Construction Law


This week Governor Nathan Deal signed Georgia HB 434 which amended the Georgia Lien Law to allow lien claimants to include overhead costs and interest in amounts claimed in mechanic’s and materialman’s liens.

As I discussed in my last post, the changes were sought by contractor groups to overcome a 2012 decision of the Georgia Court of Appeals that specifically held that overhead and administrative costs were not lienable. See 182 Tenth, LLC v. Manhattan Construction Company.

 

Problem solved, right?!  Not exactly.

Unfortunately, the new language potentially causes new problems and case-by-case litigation over whether certain costs are lienable.  This is because the standard now for determining the amount of the lien is “the amount due and owing the lien claimant under the terms of its express or implied contract, subcontract or purchase order.” O.C.G.A. §44-14-361(c).

This change appears to make the lien claimant’s contract the controlling authority on what amounts are lienable rather than looking to statutory definitions or references for that answer.  This would be a significant departure from how the Georgia Lien Law has been interpreted in the past. And, more importantly, it will turn the issue of “what is lienable” into a case-by-case determination.

 

What is “due and owing?”

Here are a few situations that I think will arise as a result of the new statutory language:

  • We now know that interest can be included in the amount of the lien, but at what rate?  The new Lien Law is not clear on that issue.  If the contract contains an interest clause, then presumably the contract rate would apply, but often contracts do not provide for interest on unpaid amounts.  If that is the case, should the general pre-judgment interest rate apply, the rate for commercial accounts, or should the interest rate of the Georgia Prompt Pay Act apply?
  • Another issue that will almost certainly be raised by this new language is whether attorneys’ fees can be included in a lien if the lien claimant’s contract allows recovery of attorneys’ fees.  But, what if the contract allows for recovery of attorneys’ fees only if the lien claimant prevails?
  • Historically, delay damages for extended overhead and idle equipment have not been lienable because these were not labor and materials that were actually incorporated into the project.  However, it is at least arguable now that a lien claimant can include delay damages if its contract allows recovery of delay damages.  However, what if the lien claimant is a subcontractor whose contract provides that the sub recovers delay damages only to the extent that the prime contractor recovers from the owner, but it has not yet been determined that the delay was caused by the owner or that the prime will recover delay damages from the owner?

There is a potential here for contractors to use this new and untested language to inflate or exaggerate the liens by including significant amounts for items that are actually in dispute.  For example, claims for delay damages and attorneys’ fees can outsize contract balances and change orders by exponential amounts.  If this starts to happen, expect owners to take action—either by seeking relief from the courts in the form of penalties or damages for overstated liens, or by lobbying the Georgia Legislature for further amendments to the Georgia Lien Law that provides better guidance as to what items are lienable.

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It’s that time of year again when Georgia legislators work to pass the laws that will take effect for 2013-2014.  This year, there are a couple of bills working their way through the chambers that will directly affect construction contractors and construction projects in this State.

HB434

Introduced by Representatives Tom Weldon, Wendall Willard, and Mike Jacobs, HB 434 adds language to the Georgia mechanic’s lien law (O.C.G.A. §14-44-361) that specifically allows a lien holder to include in the lien amount “the amount due and owing…under the terms of its contract, subcontract, or purchase order.”

It also provides that in the absence of a contract, the lien may include amounts for “the unpaid value of the labor, materials, and services provided by the lien claimant for the improvement of real estate.”

HB 434 is currently before the Judiciary Committee.

SB70

Senate Bill 70 allows the Georgia Department of Transportation greater flexibility in using the design-build delivery method for procuring construction related services and expands the use of design-build projects.  The bill allows the DOT to skip over the Request for Qualifications step, and procure a design-build contract simply through a Request for Proposals.  The bill also eliminates some of the restrictions and requirements relating to design-build procurements.

SB 70 passed the Senate unanimously on February 25, 2013 and is now making its way through the House.

Check back for updates on these bills in the final weeks of the legislative session.

Do you know of any other bills pending in the Georgia Legislature that might be of interest to the construction industry?  If so, tell us about it.

If you’ve never heard of the terms “Design Specification” or “Performance Specification” or you’ve heard of them but don’t know what they mean or why they matter, then you have probably never been involved in a dispute or litigation relating to defective specifications or inadequate designs.

A “Design Specification” sets forth in detail the materials to be employed and the manner in which the work is to be performed. The contractor is required to follow them as one would a road map and without deviation.  A “Performance Specification” describes an end result, an objective or standard to be achieved and leaves the determination of how to reach the result to the contractor

These terms are legal terms that are derived from a long-standing legal concept known as the implied warranty of specifications.  It’s also referred to as the “Spearin Doctrine,” because of a landmark ruling of the U.S. Supreme Court that set out the rule relating to the implied warranty in the context of a government construction contract.  Since that ruling, this doctrine has been adopted by virtually every state and is applied to both public and private construction projects.

Here’s what it says:

“Where one agrees to do for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation because unforeseen difficulties are encountered…But if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.”

United States v. Spearin, 248 U.S. 132 (1918)

In other words, the owner impliedly warrants that if the contractor completes the work in accordance with the owner’s plans and specifications but there is a deficiency or failure, the owner, not the contractor, is responsible.

This is why it matters whether a particular component of the design at issue is determined to be a “design specification” or a “performance specification:”

  • In general, the implied warranty of specifications applies only to design specifications, and not performance specifications
  • There can be exceptions to this general rule where the contractor has some participation in the design or control over the means and methods
  • The determination of whether a particular work item is a design or performance specification is a factually-intensive one and made on a case-by-case basis

Many claims relating to defective specifications or design hinge upon whether the specification at issue was a design or performance specification.

I’ll be discussing the legal significance of design v. performance specifications and factors affecting the allocation of risk of defective specifications in a webinar sponsored by The Construction Specifications Institute.  The webinar is Tuesday, April 3rd at 2:00pm Eastern time and registration is open to anyone.  Click here for more information or to register.

At first glance, this case looked like a personal injury case and I had very little interest.  But, as I read further, I quickly realized that this case turns on contract law and has serious implications for owners and contractors with respect to liability for third-party claims.  The case is called Estate of Pitts v. City of Atlanta, and the troubling decision was entered by the Georgia Court of Appeals on October 5, 2011.

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.

Happy New Year Blog Readers!  After a lengthy holiday break, we are now resuming our regular posts.  Forecasts for the construction industry for 2011 are mixed, but virtually everyone agrees that green building is permeating every sector of design, construction, and building operation and management.  So, here’s to a green 2011!

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.