Here’s what happened:

• On June 14, 2007, a construction worker named Mack Pitts was killed on a project at the Atlanta airport when he was struck by a vehicle driven by an employee of A&G Trucking, Inc.

• In an action separate from this case, the estate of Mr. Pitts sued and obtained a wrongful death judgment against A&G Trucking, but the judgment exceeded the limits of A&G Trucking’s auto liability insurance coverage

• The estate of Mr. Pitts then sued the City of Atlanta and several contractors alleging that the City and the contractors breached their contractual duties to require that A&G Trucking carried the minimum required auto liability insurance; the estate further alleged that the City breached the ministerial duty to require A&G Trucking to carry insurance in the amount dictated by the contract

• The trial court granted summary judgment in favor of the contractors and the City on the breach of contract claims on the grounds that the Estate lacked standing to enforce the contractual minimum insurance requirement, and granted summary judgment to the City on the ministerial duty claim (this part of the decision was not overturned by the Court of Appeals)

• The Court of Appeals reversed the trial court’s summary judgment in favor of the City and the contractors on the breach of contract claims holding that Mr. Pitts was a third-party beneficiary to the construction contracts (the prime and subcontract) that contained minimum auto liability insurance requirements of $10,000,000

The most fascinating (and scary) part of this case is how the Court of Appeals persuaded itself that Mr. Pitts was an intended third-party beneficiary of the prime and subcontract.  Normally, to make a claim as a third-party beneficiary, a claimant has to show that the parties to the contract clearly intended to provide a benefit to that claimant.  The benefit can not be merely incidental, but must have been intended.  That’s usually a pretty high standard.  The defense raised several good arguments against finding that Mr. Pitts’ Estate had standing to sue for breach of contract.  After all, he wasn’t a party to any of these agreements and probably never even saw the contracts themselves or knew of their contents.  To conclude that the Owner, prime contractor, and subcontractor all entered into agreements with the intent to provide Mr. Pitts third-party benefits and rights to enforce those agreements on his behalf seems like a stretch.  But that’s exactly what the Court of Appeals held.

The Court was apparently persuaded by language contained in the OCIP (Owner Controlled Insurance Program) that stated its purpose was “to provide one master insurance program that provides broad coverages with high limits that will benefit all participants involved in the project.”  The Court looked to the definition of “participant” to determine that it was broad enough to include individual workers on the project, not just other contractors.

There was one argument buried deep in the decision that addressed a provision of the subcontract that expressly stated that no third-party benefits were created.  This seemed like a great argument and might well have changed the outcome of the case.  However, the provision was worded too narrowly.  The exclusionary language referred only to Subcontractor’s lower tier subcontractors and vendors.  Thus, the Court correctly found that this provision did not apply to Mr. Pitts because he was not a subcontractor or vendor the Subcontractor.

Some of the defendants are seeking the Court’s reconsideration of this decision, and given the impact of this decision, there may be further appeals to come.  But until the dust has settled and the final decision on this case has been made, there are at least two lessons that every owner, contractor, and construction lawyer in Georgia should take away:  (1)  be absolutely sure that contractors and subcontractors at every level are carrying the minimum insurance coverages required by their contracts; and (2) draft “no third-party beneficiary” clauses very broadly to expressly exclude rights of third-party beneficiaries of any kind.

I’ll share a couple cases to see if you agree with our characterization:

Scary case #1:

U.S. ex. rel. Roc Carter Co, LLC v. Freedom Demolition, Inc., 2009 WL 3418196 (M.D. Ga. 2009)

• In this case, the U.S. leased property on a military base to a private corporation for the purpose of constructing, operating and maintaining a military housing facility

• The lease limited government’s liability to that of a lessor and stated construction was a private undertaking

• The corporation then entered into design-build contract to construct military housing on the leased property

• The contractor provided payment and performance bonds naming the U.S. and project lender as co-obligees

• A second-tier subcontractor sued the contractor and surety its under the Miller Act for labor and materials provided to the project

• The U.S. District Court dismissed the subcontractor’s suit, holding that the Miller Act did not apply because U.S. was not a party to the design-build contract and the project did not involve a contract to construct a “public work”

• The District Court set for the three elements that it determined were required to have a “public work” contract: (1) there must be a construction contract, (2) the U.S. must be a party to the construction contract; and (3) the contract must require Payment and Performance bonds that are in favor of U.S.

The “scary” part of this case is that there would have been no reasonable way for the second-tier subcontractor to know that the Miller Act would not apply to its claims against the surety.  The subcontractor would not have had access to the lease between the U.S. and the private company, and likely would not even had access to the construction contract between the lessee and the general contractor.  The work was performed on a U.S. military base, and involved the construction of military housing.  The payment and performance bonds issued by the contractor named the U.S. as a co-obligee, and therefore, it would have been reasonable to assume that the U.S. was a party to the construction contract.

I suppose the lesson of this case is that now all parties supplying labor and materials to a construction project which they believe to be a federal government project must undertake “due diligence” to make sure that the U.S. is a party to the construction contract and that the payment and performance bonds are written in favor of the U.S.

Scary case #2:

U.S ex. rel. Sigler v. AMC and E.C Scarborough, 2010 WL 5100913 (D. Nev. 2010)

• This case involved a second-tier supplier suing a surety under the Miller Act

• The surety was an individual, not a corporation (yes, that’s possible under the Miller Act in very limited circumstances)

• The individual surety collected a premium for only one year and the payment bond stated that it was limited to the first year of the project

• The supplier did not deliver materials to the project until Year 2 of the project

• The supplier argued that the limitations period in the bond impeded the purpose of the Miller Act, and that the GC violated the Act.

• The U.S. District Court granted the surety’s motion for summary judgment, finding that “The Court cannot hold a surety liable for coverage that it did not intend to provide.”

Again, the “scary” part of this case is that there was no reasonable way for the supplier to have known at the time that it supplied the materials that the limitations period for the bond had already expired!!  Typically, subcontractors and suppliers do not request a copy of the payment bond until after they supply materials and labor and do not get paid.  In fact, the Miller Act only requires a Contracting Officer to provide a copy of the payment if requested by a subcontractor or supplier by affidavit post performance. At that point, it was already too late for the supplier to file a bond claim under limitation provided for in this bond.

In this case the supplier has filed a motion for reconsideration that is still pending, so this decision is not yet final.  But this case, like the Roc Carter case described above, require subcontractors and suppliers to take exceptional measures to secure copies of the contracts and bonds prior to beginning any work—measures that have not been common practice in the construction industry to this point. 

From our perspective, these cases are scary for contractors and their lawyers who counsel them about precautions to take to preserve and protect payment bond claim rights.  The two cases create new hurdles for contractors performing work on federal public projects to jump in order to protect their bond claim rights.

What do you think—is “scary” an appropriate adjective to describe the outcomes of these cases?

Last year, it seemed like Georgia was turning a corner on its conservative approach to energy policies. First, there was the decision of the Public Service Commission announced that it approved an increase in the amount of solar energy purchased by Georgia Power—effectively doubling the amounts that had been allowed previously. Then, the citizens of Georgia voted for a constitutional amendment to allow state agencies to enter into energy savings performance contracts. It looked like Georgia was serious about reducing energy demands and increasing alternative energy production. So, what happened?

Some believe that the solar tax credits were re-prioritized because the legislature has been focused on proposals to make sweeping changes to the Georgia tax code in an effort to make Georgia more competitive in attracting businesses to move here while maintaining revenue needed for the budget.

Granted, that is a compelling issue for policy makers. But, if we believe that we must reform the tax code to entice businesses to come to Georgia, then isn’t it equally important to include tax credits that support and promote the businesses that are already here?

Georgia has a budding solar industry that includes solar manufacturers, installers and vendors. These businesses are here now—employing Georgians and paying taxes. As alternative energy becomes more prevalent, these companies will continue to grow and become an even more important part of our state economy. We want them to stay here and grow here. One way to support these businesses is by funding tax credits that promote their industry.

There is another good reason for the solar tax credits. Georgia has some of the greatest solar capacity of any state in the U.S. We should be a leader in solar energy production and a model for states trying to reduce energy costs and reliance upon fossil fuels. Instead, we lag behind states like Pennsylvania, which has used energy policies and tax credits to develop a highly successful solar energy program despite the fact that its solar capacity is significantly less than Georgia.

Does anyone see a downside to increasing solar energy production in Georgia?

This week, I participated in what I hope will be the first of several workshops for state agencies about performance contracting.  The workshop was really an introduction to performance contracting–I would liken it to a “Performance Contracting 101.”   Performance contracts are not like traditional construction contracts or service agreements, and the goal of the workshop was to teach public owners the nuances of performance contracts and to make them comfortable with the process.

Here is a rundown of the workshop:

Richard Stogner,  C.O.O. of DeKalb County: Richard gave opening remarks as the host of the workshop and shared his experience in having overseen the first major county-wide performance contracting project in Georgia.

David Godfrey, Director of Georgia Environmental Finance Authority (GEFA): David’s office is in charge of overseeing and administering the performance contracting program in Georgia.  He provided a review of important sections of the performance contracting statute and gave an update on status of implementation.

Wayne Robertson, Principal at EnergyAce: Wayne explained the fundamentals of the technical aspects of performance contracting, such as energy audits, baseline energy use calculations, and measurement and verification methods.

Peter Floyd, Partner at Alston & Bird: Peter addressed some of the statutory requirements for performance contracting, and explained some of the unique features of the financing aspects to performance contracts.

David Fisher, Director of Facilities Management of DeKalb County: David gave a detailed presentation about DeKalb County’s nearly $10 million performance contracting project, which was so successful that it has turned out to generate even more savings than had originally been projected.

My presentation focused on best practices and avoiding pitfalls of performance contracts.

It was clear from the questions and comments made by the attendants that public agencies are excited about the opportunity to use performance contracting and anxious to get started.  There will be no shortage of “potential customers” for performance contracting projects.  I suspect that the only limit will be whatever cap is established (as required by the statute) for purposes of including the financing obligations in the state budget.  (I’ll explain that in more detail in a later blog post).

If you are interested in learning more about the workshop or performance contracting, the presentations have all been posted on the website of the workshop’s sponsor, EnergyAce.

Over the past few years, more and more contractors are finding it necessary to file liens in an attempt to collect money for work performed on projects.  I have personally filed more liens for my clients in the past two years than in all of my prior years of practice before then.  It’s a sign of the times.

However, I recently ran into an issue that I had never before encountered.  I filed a lien for a client, who was a subcontractor on project.  He later negotiated with the prime contractor to be paid in exchange for an assignment of my client’s rights to proceed against the owner, including the lien rights.  So, I had to determine whether a Georgia lien is assignable.

I was surprised to learn that there is a very old Georgia case from 1914, Logue v. Walker, which basically held that a mechanic’s lien was assignable.  But, that Court specifically relied on a Georgia statute that is no longer in existence.  Additionally, the assignee of the liens in that case was itself a contractor that had performed work on the project.

While this case has not been reversed or otherwise overruled, there is some uncertainty as to whether the courts would interpret the current Georgia lien law, which is typically strictly construed, as permitting assignable rights in liens created under that statute.

Additionally, there is no case law at all that addresses whether a lien can be assigned to a person or company that could not file its own claim of lien on the project.  In other words—while a subcontractor may be able to assign his lien rights to the project’s general contractor, there is currently no authority that suggests the subcontractor could assign his lien to a person or company unrelated to the project, such as a bank or other creditor.

Of course, if you are the party assigning the claim of lien, you have little interest in this issue.  However, if you are considering taking an assignment of a lien or lien rights, you definitely want to understand the enforceability of those rights during your negotiations with the lien holder.

Some of the property managers that were quoted in the article said that they did not seek LEED certification—even for buildings that would likely meet LEED standards—because the costs of filing for the certification were too high.  Additionally, they state in the article that they don’t believe that they have lost any tenants for non-LEED buildings.

As an alternative to LEED certification, some of the property management firms are seeking other green building/energy efficiency certifications such as Energy Star ratings.  In some instances, the property management firms themselves have developed their own “green building” promotional branding, which highlights the sustainable and efficiency characteristics of the property.

Of course, all of the property management firms identified in the article have embraced LEED buildings to some extent within their businesses and portfolios—even those firms whose property managers felt that LEED certification costs were too high for some projects to be of value.  So, obviously none of these firms have completely

Do you agree that LEED certification costs are too expensive to be of value to property management firms or building owners?

I think it’s reasonable to project that public projects will decline next year due to the fact that stimulus funds will largely be spent.  And, I certainly want to believe that private development and construction will pick up during 2011.  But there are also plenty of people still predicting that 2011 will be even worse than 2010 for new development and construction back log.

What do you think?  Do you believe that 2011 is the turn-around year for construction or do you think we will have to wait until 2012 before the industry starts to see any real increase in activity?

Here’s the thing—constitution amendments are usually so poorly worded that even those that merit passing often do not because no one understands what they say or what the proposed amendment is meant to achieve.  I’m afraid that this is true for Amendment 4 as well.

On the ballot, it will read like this:

“Allows the State to execute multiyear contracts for projects to improve energy efficiency and conservation.

Senate Resolution No. 1231

Ga. L. 2010, p. 1264

Shall the Constitution be amended so as to provide for guaranteed cost savings for the state by authorizing a state entity to enter into multiyear contracts which obligate state funds for energy efficiency or conservation improvement projects?

(   )  YES

(   )  NO”

The actual amendment will be to add a new paragraph to Article VII, Section IV to read as follows:

Paragraph XII.  Multiyear contracts for energy efficiency or conservation improvement.

The General Assembly may by general law authorize state governmental entities to incur debt for the purpose of entering into multiyear contracts for governmental energy efficiency or conservation improvement projects in which payments are guaranteed over the term of the contract by vendors based on the realization of specified savings or revenue gains attributable solely to the improvements; provided, however, that any such contract shall not exceed ten years unless otherwise provided by general law.

In an earlier post, I explain how performance contracts work and address the most obvious benefit of these contracts, which is the ability of cash-strapped governments to obtain badly needed renovations and infrastructure improvements without having to have a large annual capital budget.  But there are several other good reasons to vote for this amendment.

• It’s good for the environment. The improvements implemented through performance contracts will mean that the state is consuming significantly less energy and water.  In Georgia, anything that reduces demand on the electric grid during peak times and/or conserves the use of water are good things.

• It will save money. State and local governments will immediately save money on electricity, natural gas and water bills upon completion of the improvements.  I have seen some projections of savings between $30 million and $50 million per year.  In times like these when governments are looking for every way to cut budgets and decrease spending, this is an innovative and painless way to do it.

• It will restore construction jobs. Georgia sustained greater than average unemployment rates during this recession and one of the sectors that lost the most jobs was construction.  If state and local governments start entering into performance contracts, Georgia will have a greater demand for construction workers again.  In fact, the National Association of Energy Services Companies (NAESCO) has performed an estimate of the potential employment growth that could come from performance contracting.  Click here to read it.

• It has a history of success. The federal government and many of our border states have been using performance contracting for decades to fund renovations, retrofits and infrastructure improvements with great success.  Georgia does not have to invent the wheel with respect to performance contracting legislation, and can benefit from the lessons learned by these other government entities.

• It will NOT increase taxes. State and local governments will not need to raise taxes in order to build annual capital budgets for these projects.  The projects are paid for by the savings in the energy bills created by the improvements.  If the energy savings are less than what was promised, then the ESCO, not the government is responsible for the shortfall.

The vote on Amendment 4 is well timed.  It comes at a time when we need it most.  Let’s not let this opportunity slip by.

Here are some of the highlights addressed by the panelists:

Public Sector Panel

• Fort Benning is rapidly expanding and building due to the movement of troops and operations from Fort Knox in Tennessee

• Five years ago, annual construction at Fort Benning was consistently around $50 million per year

• In 2009-2011, spending for construction projects at the base will exceed $350 million per year

• As a result of the increased training mission at Fort Benning, it will have a higher priority for future congressional funding

• After the major expansion is complete, annual construction budgets for the base are expected to increase for operations and maintenance contracts

• The expansion of Fort Benning and the movement of troops to that area will bring additional construction projects in the form of county infrastructure improvements and schools and private development in residential, commercial and retail

• GSFIC currently has 10 major projects open for solicitation that listed on the Georgia Procurement Registry and total more than $110 million

• GSFIC recently had a bond sale in October which will fund just under $100 million in new construction projects

• GSFIC also has 40 “smaller” projects totaling more than $35 million in energy-related upgrades that range from $50,000 to $2.2 million per project

• Most new GSFIC projects will have some LEED requirements

• GSFIC is embracing BIM (Building Information Modeling) and will include BIM expectations in future solicitations

• General Services Administration (GSA) has active opportunities for the construction of courthouses in Mobile, AL; Savannah, GA; and Nashville, TN

• Funds have been designated by Congress for the design of courthouses in Charlotte, NC; Greenville, SC; and Anniston, AL

Private Sector Panel

• Experts believe that the Atlanta residential real estate market has bottomed out, but will not recover quickly

• Apartments and multi-family housing will likely be the first sector of real estate to see capital investments and the first sector of construction to see increased activity

• Panelists did not believe that the Atlanta commercial real estate market bottomed out

• Technology has permanently changed the need for office space

• Banks have liquidity and capital but are not lending due to the uncertainty of regulations and policies from the federal government

• Once there is certainty in banking regulations, banks will begin funding new projects again but credit will be harder to obtain

• Even during the recession, data shows that new companies are coming to Georgia and that existing companies are expanding

• Atlanta metropolitan area has experienced a net increase in population even during the recession

• Georgia is attracting companies in the biomedical, renewable energy, film producing and imaging industries

• Future growth for the Atlanta area will have to be focused on more density rather than growing “outward”

Key Note Speaker

• Jacoby Development purchased the former Ford Hapeville assembly plant to re-develop into a mixed-use development called “Aerotropolis” and has already completed demolition and cleaning of brownfields at the site

• The timeline for development of Aerotropolis has shortened as a result of interest from potential tenants and end-users

• The roof of the parking deck at Aerotropolis will be covered with solar panels capable of generating 10 MW of electricity that will be sold back to the grid (10 MW is roughly 1/3 of the electricity needs of Atlanta Hartsfield-Jackson Airport)

• Jacoby is working on solutions to connect Aerotropolis to the airport and Atlanta through fixed-rail systems or other transit systems

We want to thank our co-hosts, panelists, key note speaker, and attendees for making this such a successful event!   Please tell us what you think.

Gifford has apparently been an outspoken opponent of the LEED rating system for a while, and in his lawsuit he alleges that the USGBC falsely claims that the LEED rating system creates energy savings when it does not and by doing so deceives building owners, designers, and other building professionals into believing that LEED buildings are more energy efficient than non-LEED buildings.  Of course, I’m paraphrasing the allegations—you can download the actual complaint here to read all of the claims.

Shari Shapiro has written a great commentary on www.greenbuildinglawblog.com about whether the designated categories of plaintiffs are similarly situated enough in order to survive the fairly rigorous legal standards for certifying a “class action.”  I agree with her assessment that the types of plaintiffs and the ways in which they have allegedly been damaged by the LEED rating system do vary widely.   For this reason, I believe the attorney for the plaintiffs has an uphill battle to fight on the class certification. 

But aside from the class action aspect of the lawsuit, Gifford’s main arguments are that the USGBC is perpetrating a huge fraud against the world by claiming that LEED certified buildings are energy efficient.  He claims that LEED does not require verification or actual energy use data to measure performance of energy savings strategies for which LEED points are awarded.  (Under the latest version of LEED—LEED 3.0—measurement and verification of energy performance is required following construction)   He also claims that the USGBC has manipulated data from a study performed by the New Buildings Institute (NBI) in March 2008 to falsely promote that LEED buildings are more energy efficient than non-LEED buildings.

Now, I obviously don’t know enough about the facts to make a judgment as to whether they are true.  But, I also feel like Gifford is not giving enough credit to his purported class of plaintiffs.  To believe Gifford’s allegations, you have to believe that sophisticated building owners and operators, as well as licensed design and construction professionals have all been misled by the USGBC to believe that LEED certification equals energy efficiency—end of story.  That ignores the fact that the LEED rating system has 5 other core areas of sustainable strategies that are part of the certification point system.  Energy efficiency is just one aspect of LEED, not the whole enchilada. 

 Is Gifford suggesting that building owners do not have any idea what they are bargaining for when they contract for a LEED-certified building?  Or does he simply believe that the value the owners place upon the LEED certification is solely based upon the energy efficiency strategies that are implemented rather than the cumulative impact of all of the sustainability measures that are part of a LEED building?

This case has just started and many bloggers and other green building professionals (including me) will be analyzing it and writing about as it progresses.   So, there will be more to come on this case.

What do you think about this lawsuit?  Do you think it has merit?