Legislative Update for Residential Construction

The Maryland Legislature passed several bills affecting residential construction.

House Bill 409 increased the limit from $15,000 to $20,000 on an award to for a single claimant making a claim on the Home Improvement Guaranty Fund.

House Bill 1309 requires the Maryland Home Improvement Commission to establish a licensing program for companies providing mold remediation on residential properties.

Senate Bill 1008/House Bill 1557 double the initial registration fee for home builders to $600. It also doubles the renewal fee to $300 for a builder who has issued building permits for fewer than 11 homes in the preceding year. The fee for a builder who has issued building permits for 11 or more homes is doubled to $600.

The Consumer Protection Division is required to establish a Home Builder Guaranty Fund to compensate claimants for an actual loss that results from an act or omission by a registrant. A home builder must pay the Guaranty Fund a fee of up to $50 with each application for a new home construction permit. The Consumer Protection Division may award up to $50,000 to one claimant for acts or omissions of one builder, the division may not award more than $300,000 to all claimants for acts or omissions of a single builder unless the builder reimburses the fund for all of or a portion of these claims. A claim against the Guaranty Fund must be filed within two years of discovering any damage or defect. A builder whose act or omission gave rise to a claim against the Guaranty Fund must reimburse the fund. The failure to do so may result in referral to the Central Collection Unit, a lien on the builder's real property and suspension of the builder's registration until the claims are paid in full.

For further information contact Matt Hjortsberg at (410) 583-2400 or at Hjortsberg@bowie-jensen.com

Maryland Legistlature Caps Retainage

At the end of the 2008 General Session in Annapolis, the General Assembly passed Senate Bill 313, which places a 5% retainage cap on construction contracts in excess of $250,000.00, when a performance and payment bond is furnished. The bill requires the contractor to furnish 100% security to guarantee performance of the contract and 100% security to guarantee payment for labor and materials. Further, the retention proceeds of any payment due from a contractor to a subcontractor may not exceed the percentage of retainage from the owner to the contractor. This also applies to subcontractors and lower-tiered subcontractors.

This new law will not prohibit withholding of any amount due from the owner to the contractor, contractor to subcontractor, or subcontractor to lower-tiered subcontractor if the non-paying party reasonably determines that the contractor or subcontractor’s performance under the contract provides reasonable grounds for withholding the additional amount. Upon approval by the Governor, this new law will take effect on October 1, 2008.

Incorporation of the Prime Contract: A Hidden Benefit

Virtually every subcontract agreement incorporates by reference the prime contract between the general contractor and the owner. Too often subcontractors do not obtain a copy of the prime contract and consequently become bound to terms and conditions they have not seen much less read. Moreover, the contractual provision incorporating the prime contract may state that if a conflict exists the contract language must be interpreted in a way that favors the general contractor. For example it may state:

"In the event of variations, conflicts, or inconsistencies between or among the terms, provisions or conditions of this Subcontract and any other Contract Documents, the terms, provisions and conditions which grant greater rights or remedies to Contractor or impose higher standards with regard to the obligations, responsibilities and scope of work of the Subcontractor shall control."

This provision, while seemingly favorable to the general contractor, does provide a benefit to a subcontractor because it fails to address the "rights" of a subcontractor. Consequently, if the subcontract allows for a larger overhead and profit markup than the prime contract, the allowable overhead and profit markup is a "right" of the subcontractor, not an obligation, responsibility or part of the scope of the work; nor is a right or remedy of the Contractor. Thus, the stated overhead and profit of the subcontract will control.

These "precedence clauses" as they are called must be carefully drafted and reviewed. Moreover, as always, a subcontractor should obtain copies of all contract documents incorporated into the subcontract.

Contractual Indemnity Provisions

The Maryland Court of Appeals recently reiterated the various legal principles that trigger indemnification rights. In the context of contractual indemnity provisions, the Court recognized three basic types of indemnity provisions: (1) indemnity against loss or damage, under which the indemnitee may not recover until it has made payment or otherwise suffered an actual loss or damage within the scope of the indemnity; (2) indemnity against liability, under which an action may be brought as soon as the liability is legally imposed, as when judgment is entered, even though no actual loss has yet been sustained (the judgment has not been paid); or (3) a promise by the indemnitor “to perform a certain act or make specified payments for the benefit of the indemnitee,” under which an immediate right
of action accrues upon the failure of the indemnitor to perform, regardless of whether any actual damage has been sustained.

As evidenced by these three types of contractual provisions, the risk and exposure for the party providing indemnification in a contact can vary greatly depending upon the type of indemnification provision. Consequently, the indemnification provisions in construction contracts warrant careful scrutiny before execution.

Getting Paid: Maryland's Prompt Payment Act

The Maryland Prompt Payment Act requires timely payment to contractors performing work and furnishing materials, even in situations where the contract does not specify the payment schedule. The timing of payment depends on whether the work performed by the contractor was for an owner or for another contractor. If the contract does not provide specific dates or times for payment, payment of any undisputed amount owed under the terms of the contract must be made within 30 days after the day on which the occupancy permit is granted or 30 days after the day on which the owner or the owner’s agent takes possession, whichever is earlier. If the contract provides for specific dates or times for payment, the contractor must be paid any undisputed amount within 7 days after the date or time specified in the contract. In situations where the contract is not with an owner, but with another contractor, any undisputed amount owed to the subcontractor must be paid within 7 days after the contractor receives payment for the subcontractor’s work or materials. The Maryland Prompt Payment Act, however, does not apply to any contracts with public entities, including the State of Maryland, a county, a municipal corporation, a board of education, or a public authority or instrumentality. In addition to obtaining the undisputed payments, other remedies to contractors under the Maryland Prompt Payment Act include interest from the date the court determines that the amount owed was due and, in the event of a showing of bad faith by the non-paying party, attorney’s fees.

If you have any additional questions regarding the Maryland Prompt Payment Act, please contact Michael W. Siri at siri@bowie-jensen.com.

Application of Mechanic's Liens: Removable Machines

Maryland's highest court recently held that Maryland's Mechanic's lien laws apply to immobile but ultimately removable machines. In this case, the Court held that the contractor who constructed a dredge for a sand and gravel pit could lien the dredge. The Court drew a distinction between machines that were ultimately movable in use versus those that are merely removable. The court concluded that those machines that are movable in use are not subject to mechanic's liens whereas those that are merely removable are lienable. In this case, the Court reasoned that the Dredge was no movable in use because it was located in a sand and gravel pit and hence subject to a lien. Finally, the Court noted that machines incorporated into a building are not lienable because at that point the building itself becomes lienable

For further questions regarding Mechanic's Liens, please contact Matt Hjortsberg at 410-583-2400 or at Hjortsberg@bowie-jensen.com

Bid Protests: Timing

In a recent Maryland State Board of Contract Appeals (“Board”) case, the Board found that a contractor failed to file a timely bid protest. The Board ruled that the bid protest should have been made when the construction company knew or should have known the basis for its protest and not at the time the bid was awarded. A high burden is placed on any contractor submitting bids for State contracts, because a bid protest may need to be filed before the bid is awarded or repercussions felt by the contractor.

In this most recent case, the State Highway Administration (“SHA”) accepted invitations for bids for a Community Safety and Enhancement project (“Contract”). The bid of the lowest bidder was announced as “irregular” because of insufficient bid security; however, subsequent to the opening of the bids, the SHA found that the low bidder’s bid was valid and effective. The low bidder was then awarded the Contract. After being informed by SHA of the award of the Contract, a bid protest was brought by the second lowest bidder. The Board ultimately found that the bid protest should have been brought within seven days from the time the lowest bidder’s bid was deemed “irregular” and not within seven days after the bid was awarded. The Board, as it has done numerous times in the past, places a strict interpretation on the timing of a bid protests as it relates to a construction company’s basis for the protest. As such, if you intend to bid any public projects in Maryland, be vigilant in determining whether all proper procedures have been followed. As soon as there is a violation, even if it occurs prior to the bid being awarded, a bid protest may be your only option to protect your rights.

If you have any further questions on bid protests or construction law, please contact Michael W. Siri at siri@bowie-jensen.com.