Maryland Contractors and Soverign Immunity

The Maryland Court of Appeals recently found that a school board cannot claim the defense of sovereign immunity in breach of contract cases brought by contractors for school construction. The Court also held, however, that the contractor must show during trial that the school board has funds to pay any judgment against it in order for the waiver of sovereign immunity to be effective.

Sovereign immunity bars individuals or companies from bringing lawsuits against the State, thus protecting the State from interference with governmental functions and preserving its control over its agencies and funds. In some situations, however, a governmental agency can be sued because they have either expressly or implicitly waived their right to use sovereign immunity as a defense. The Court of Special Appeals ruled that contractors in Maryland performing work and furnishing materials on behalf of a school board and with a valid contract constitutes a waiver of sovereign immunity.

Unfortunately for Maryland contractors, the Court also ruled that contractors must prove that funds are available to satisfy any judgment made against the school board during the trial or that the school board has the ability to raise the funds necessary to satisfy recovery against it. This causes difficulty for contractors on public jobs when dealing with changes to the project and change orders.

For any questions, please contact Michael W. Siri at siri@bowie-jensen.com.

Baltimore City Adopts LEED Standards

Environmental rating systems such as LEED (Leadership in Energy and Environmental Design) are looming larger in regulatory compliance or qualification for tax credits in major building construction. Chapter 37 of the Baltimore City building code, enacted in 2009, requires that all newly constructed, “extensively modified” non-residential, and some multi-family buildings of at least 10,000 square feet of gross floor area achieve a certain LEED rating level or an as yet unspecified equivalent. (The city has yet to promulgate regulations under the new ordinance.) Other Maryland jurisdictions offer tax credits for achieving certain LEED levels, and still others apply a mix of mandates and incentives.

LEED is a rating system developed by the U.S. Green Building Council for certification at graduated levels of environmentally conscious building and design. The ratings cover six broad aspects of building and design, each with a range of prerequisites to be met and accompanying credits that may be earned toward the targeted certification level. The six areas, with examples of how credits may be earned, are:

1. Sustainable sites: reduce environmental impact by building on an already developed site rather virgin land;

2. Water efficiency: reduce potable water use in landscape irrigation by planting native species, using recycled water, watering through more efficient drip systems, among other possibilities.

3. Energy and atmosphere: use enhanced “commissioning”, which is the testing and fine-tuning of HVAC and other building systems for performance and compliance with design criteria.

4. Materials and resources: divert construction and demolition debris from landfills and incinerators by recycling or salvaging nonhazardous material.

5. Indoor environmental quality: reduce indoor air contaminants by using adhesives and sealants that comply with limits on volatile organic compounds that vaporize at room temperatures.

6. Innovation and design: achieve a significant, measurable environmental performance with a strategy that is not currently addressed in the LEED rating system.

Applying for any of the levels of LEED certification involves registration with the Green Building Certification Institute (GBCI) and stages of comment and review. In the process, a building project team may submit credit interpretation requests for clarification on the approach to a specific prerequisite or credit.

As the application of LEED becomes more prevalent in construction regulation, the challenge to builders comes not only in meeting new standards but in documenting clear agreement among the players as to allocation of responsibility for meeting them.

For any questions, please contact Jay Merwin at 410-583-2400 or merwin@bowie-jensen.com

Adverse Weather and the Delivery of Goods and Materials

As the snow slowing begins to melt away and businesses begin to dig out from the back to back snow storms of 2010, supplies and materials are once again beginning to be delivered to job sites and warehouses. In additional to various other problems associated with the snow, contractors must also consider issues arising out of delivery of goods and materials. Depending on the contract language, the responsibility for the delivery of goods or materials will be with the buyer or seller. So the first thing to determine is whether your contract covers the terms of delivery of goods and materials. Additionally, Maryland law provides coverage for such issues if your contract is silent on the issue of responsibility for deliveries.

In either case, buyers must provide facilities reasonably suited to the receipt of the goods or materials. Essentially, the buyer has to make sure that the seller of the goods and materials can drop off the shipment to the predetermined destination. This usually is not an issue, but when jobsites, parking lots, and warehouses (which usually receive these goods) are covered with snow and snow piles, problems will arise. In short, by making sure the drop off location for deliveries are clear of snow and ice, contractors will deal with the task at hand – completing their job. If you have any additional questions, please contact Michael W. Siri at 410-583-2400 or via email at siri@bowie-jensen.com.

Adverse Weather and its Impact on Construction Projects

The record snow fall that has fallen across Maryland will clearly impact many construction projects. Liquidated damages provisions, owner financing restrictions and general condition costs all place pressure on trades to complete a project on time. However, record snowfall, high winds and extreme temperatures all conspire to derail a project schedule. The entitlement to a time extension or compensation for weather delays is dictated by the construction contract. For example, the 2007 AIA A201 states "if adverse weather conditions are the basis for a Claim for additional time, such Claim shall be documented by data substantiating that weather conditions were abnormal for the period of time, could not have been reasonably anticipated and had an adverse effect on the scheduled construction." The official commentary to the 2007 AIA A201 provides an excellent example, stating that four days of unusual rain could render the job site impassable or unworkable for seven days, but if the project is closed in, it may have no impact at all. The commentary recommends documenting unusually severe weather through records from the National Oceanic and Atmospheric Administration ("NOAA"). It is important to underscore that the weather must be abnormal. To use Maryland's current weather as an example, six inches of snow in the winter is not abnormal, but forty-six inches of snow is abnormal. Some federal government contracts, and in particular those with the Army Corps of Engineers, will define exactly how much rain or snow will serve as the threshold for abnormal weather conditions.

Consistent with the AIA commentary, the contractor must not only show that the weather was abnormal but that it impacted the schedule. This is a highly factual driven analysis. For example, high winds and snow will prevent the use of construction cranes and will make certain portions of a job site impassable for many days beyond the snow fall. It could also delay material deliveries. However, assuming workers can get to the job site, it will not disrupt the running of interior conduit.

Assuming that a contractor can demonstrate the weather is abnormal and impacts the schedule, the next question is whether the contractor is entitled to additional time, money or both. In most contracts, adverse weather is an excusable but non-compensable delay. Thus, the contractor will receive only a time extension. As with most contract provisions, weather delays are a question of risk allocation, and most contracts allocate weather related risks and other "acts of God" to allow for time but not money. However, if a contractor anticipates having major equipment on the job site that will translate into significant extended general conditions costs when delays occur, the contractor should consider negotiating its contracts to allow for compensation for otherwise non-compensable delays.

Presumably, the projects around Maryland that are affected by the snow are already under contract. Contractors will have to pull those contracts out to determine the extent of their entitlement for delays. For any questions, please contact Matt Hjortsberg at 410-583-2400 or Hjortsberg@bowie-jensen.com

Subsequent to this original posting, Matt Hjortsberg was interviewed on National Public Radio ("NPR") regarding the impact of weather on construction projects. http://www.npr.org/templates/story/story.php?storyId=123635336&ft=3&f=2100140

Bowie & Jensen, LLC Successfully Represents a General Contractor in a Bid Protest with a County Public School System, Avoiding Costly and Lengthy Cour

Recently, Bowie & Jensen, LLC used a combination of pressure from the State level, the media and the legal process to force the schools system to reexamine its policies concerning the completion of minority business enterprise utilization schedules.

Bowie & Jensen demonstrated that the school system had been rejecting bids that contained minor irregularities that did not affect the overall competitiveness of the bid. Bowie & Jensen was able to help our client win the protest and the contract without going through a lengthy and expensive court battle.

What to Do if You Have a Bid Protest

With any bid protest, there are certain critical considerations. First, you must know the bid protest rules and regulations for the particular jurisdiction. These regulations vary from city to city and from county to county and can dictate the time for filing, the location and other requirements. We have even been involved in bid protests where no regulations existed and the parties had to resort to taking action in the Circuit Court. Conversely, at the Federal level there are many levels of regulations, and the aggrieved bidder has a choice of where to bring the protest.

Second, you must determine the basis for your protest as various legal standards apply depending upon the nature of the protest.

Finally, follow the money. While a project may be administered locally, its source of funds may come from the State or the Federal government. In such an instance, the State or Federal government may have an interest in ensuring that the project it has agreed to fund goes to the lowest responsive and responsible bidder.

Bowie & Jensen's Construction Law Practice
If you have any questions about bid protests or other construction matters, please feel free to call Matt Hjortsberg or Michael Siri at 410-583-2400.

Legislative Impact on Contractors: Senate Health Bill and ITLEAA

With the Associated General Contractor's of America ("AGC") reporting the unemployment of nearly one out of every four construction workers and construction spending at a six year low, two pieces of pending federal legislation threaten to increase the cost burden to construction companies: (1) the Senate Health Bill and (2) the Incorporation Transparency and Law Enforcement Assistance Act ("ITLEAA").

An amendment to the Senate's Health Care Bill excepts construction firms from certain small business exemptions. The Senate's version of the health care legislation has exempted businesses who employ between 5 and 49 people from having to pay fines for carrying uninsured employees. However, the "contractor exception" in the Senate Bill would require construction industry employers who employ at least five full-time employees and have more than $250,000 in annual payroll expenses to offer health insurance by 2014. If they do not, they will have to pay a $750 fine for each employee that receives federally subsidized coverage. The health insurance requirements in the Senate Bill apply to all employers that have 50 or more employees. Because the average size of a construction industry employer is less than 50 employees, this amendment was placed into the Senate's Bill to close a perceived loop hole for this industry. While the AGC opposes this amendment because of the cost burden, the National Electrical Contractors Association ("NECA") supports it. NECA argues that it will level the playing field for union contractors who have to pay for health care benefits through agreements with local unions. The good news for both organizations and the construction industry, however, is that the Senate Bill approves the funding of 1.5 billion dollars for the construction and improvement of community health centers.

The second piece of federal legislation that threatens the cost burden of contractors, as well as other small businesses, is the ITLEAA. With much of the media focus on the health care legislation, this Senate Bill has been somewhat unnoticed. This Bill requires States to collect the names of "beneficial owners" of corporations and limited liability companies for the purposes of tracking potential money laundering, wire fraud, tax evasion and terrorist activity where individuals hide behind the anonymity of a privately held entity. The Bill defines "beneficial owner" as "an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual directly or indirectly, to control , manage, or direct the corporation or limited liability company." While noble in purpose, some business groups have pointed to the costly unintended consequences of this proposed legislation. These groups have focused on the reporting requirements that will impact all small and privately held businesses across the country. Beginning in 2012, each applicant that forms a corporation or LLC will have to list the name and current address of each beneficial owner, and if a beneficial owner uses another privately held entity "to exercise control" the applicant must provide the same identifying information for that beneficial owner and the associated entity. Every other corporation and LLC, regardless of formation date, must disclose the same information in an annual filing with its State or if no annual filing is required by the State, it must make the disclosure every time there is a change in beneficial ownership.

The reporting and formation requirements are more onerous if a beneficial owner is not a United States Citizen or lawful permanent resident. In this instance, a formation agent employed by a State must certify that he or she has verified the name, address and identity of the foreign beneficial owner, has obtained a copy of a government issued passport and photograph of the beneficial owner will provide this information upon request.

Another criticism is the sweeping definition of "beneficial owner" set forth above and the inevitable judgment calls it will require in identifying who has direct or indirect ability to control, manage or direct the corporation or LLC, especially considering the bill's particularly harsh criminal and civil penalties. Are creditors beneficial owners? Board members? Minority owners? Non-equity managers? Family members? The grantor of a revocable trust where the trust is an owner? With the vast number of permutations used in business formation and management, coupled with the enormous amount of privately held companies and LLC's in this country, it is not difficult to see how this Bill is sure to create difficulties for not only contractors but other small businesses as well. This Bill is currently in committee.

Please contact Matt Hjortsberg at 410-583-2400 or at hjortsberg@bowie-jensen.com with questions.

AIA Document A107-1997 – Waiver of Subrogation Rights

The Court of Appeals of Maryland (the "Court of Appeals") has granted certiorari to hear a case regarding whether the Waiver of Subrogation clause in AIA Document A107-1997 applies after the completion of and final payment for the underlying project when such clause does not impose a temporal limitation (See John L. Mattingly Construction, Co. v. Hartford Underwriters Insurance Co. - Case No. 136, September Term 2009). The case is an appeal of Hartford Underwriters Insurance Co. v. Phoebus, 187 Md. App. 668 (2009), where the Court of Special Appeals of Maryland (the "Court of Special Appeals") concluded that the Waiver of Subrogation clause does not apply after the completion of and final payment for the underlying project. Therefore, according to the reasoning of the Court of Special Appeals, an insurance company could bring a suit as subrogee of an owner for damage occurring subsequent to the completion of and final payment for the underlying project. The Court of Special Appeals' reasoning does, however, suggest that the inclusion of a Completed Project Insurance clause would prevent an insurance company from bringing a suit as subrogee of an owner under the same circumstances.

When the Court of Appeals renders its decision in John L. Mattingly Construction, Co. v. Hartford Underwriters Insurance Co., we will accordingly update this entry.

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