Mechanic’s Liens - The 15% Issue

A mechanic’s lien secures payment for labor or materials supplied by a subcontractor or general contractor in the improvement of real property, but not all buildings are subject to a mechanic’s lien. Unless the building is newly constructed, work done on a building to repair, rebuild, or improve an existing building must increase its value by 15%. If the work performed does not increase the value of the property by 15%, then Maryland will not permit the establishment of a mechanic’s lien.

Bowie & Jensen represented a heating, ventilation and air conditioning subcontractor performing work on a television studio in Baltimore City. The HVAC subcontractor filed a mechanic’s lien after the owner failed to pay any of the subcontractors. The owner took the position that the work performed did not increase the value of the building by 15% and therefore, a mechanic’s lien was not an appropriate remedy. In preparation, we enlisted an expert to valuate the building, who had to determine the value of the building and the amount of work performed on the building by all of the subcontractors.

Calculating whether the building has been repaired, rebuilt or improved by 15% is based solely on the value of the work performed and not the amount listed in the negotiated contract price. The 15% threshold applies to the increase in value of the entire building, even if the work performed is an addition to an existing building or work to repair a specific section of the building. However, the Maryland’s definition of a “building” for the purposes of establishing a mechanic’s lien has been drafted broadly and includes the drilling and installation of wells to supply water; the construction or installation of any swimming pool or fencing; the sodding, seeding or planting in or about the premises of any shrubs, trees, plants, flowers or nursery products; the grading, filing, landscaping, and paving of the premises; and the leasing of equipment, with or without an operator, for use for or about the building. If the work falls under any of these terms, the value of the work performed must be at least 15% of the total property.

Authority to Issue Changes on Govt. Contracts

The Federal Circuit released an opinion that should serve as a cautionary tale on some of the perils of contracting with the Federal Govt. This case arose out of claims for equitable adjustment on a renovation project at the Great Lakes Naval Research Center.

The Federal Circuit reversed many of the findings in favor of the General Contractor on the basis that the Project Manager for the Navy did not have actual authority to approve the changes claimed by the General Contractor. The prime contract incorporated by reference many of the standard clauses from the Federal Aquisition Regulations (FAR)and the Naval Facilities Engineering Command clauses that conferred sole authority to the Navy's Contracting Officer (CO) to approve and issue modifications to the contract.

After execution of the contract but before construction began the parties attended a meeting that the contract required the CO to attend. The CO, however, did not attend and instead the Resident Officer In Charge of Contracts,(ROICC) who was also the Project Manager, attended. At the conference, the Navy issued a detailed set of construction guidelines that designated the ROICC as the person in charge of contract administration and as the designated recipient of all correspondence. The Navy also gave a presentation that stated that no modifications to the contract could occur without written notification from the ROICC. Following a personnel change in the ROICC/PM position, the General Contractor submitted a RFI seeking “documentation of assignment of authority” and the “level of authority” of ROICC/PM, among others. The Navy responded to this RFI with respect as follows:

"Mr. Tim Meland. Project Manager: Serves as the Government Construction Manager on all assigned projects. Responsible for construction management and contract administration on assigned projects while providing quality assurance and technical engineering construction advice. Provides technical and administrative direction to resolve problems encountered during construction. A project manager analyzes and Interprets contract drawings and specifications to determine the extent of Contractors’ responsibility. Prepares and/or coordinates correspondence, submittal reviews, estimates, and contract modifications in support to ensure a satisfactory and timely completion of projects."

During the course of the project the ROICC responded to RFIs and approved deviations from the plans and specifications. At the conclusion of the project, the general contractor submitted a claim for equitable adjustment. The CO found entitlement on many of the changes and the parties proceeded to the Board of Contract Appeals where the General Contractor asserted that the only issue was a determination of quantum. However, the Navy then argued that the ROICC had no authority to approve modifications to the contract. The Board of Contract Appeals found that the ROICC PM directed changes that resulted in costs beyond those required by the contract and that these changes were compensable because the delegation of authority clause in the contract gave him responsibility for construction management and contract administration.

The Federal Circuit reversed, holding that despite the conduct of the Navy, its ROICC PM did not have express authority to approve modifications to the contract. While the General Contractor argued that the authority was implied, the Court rejected this contention stating that where the contract confers authority solely to the CO to modify the contract, there is no way that the same authority could be implied in someone else.

The Federal Circuit sent the case back to the Board of Contract Appeals to consider whether the CO ratified, or adopted, the changes issued by the ROICC when the CO issued a letter finding entitlement. Ratification requires knowledge of material facts involving the unauthorized act and approval of the activity by one with authority. The Navy has taken the position that the CO did not have knowledge of all material facts when he issued the letter finding entitlement.

This case demonstrates how the failure to abide by the express terms of a contract can lead to a patently unfair result.

Matt Hjortsberg

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Construction Litigation and Preserving Project Documents

Construction litigation is not immune from the perils and pitfalls of "E-Discovery" sanctions. "E-Discovery," or "EDD" - electronic data discovery, is the evolving are of the law that governs a party's duty to preserve and produce electronic documents and data in litigation. Its basic principal is as follows: "The obligation to preserve evidence arises when the party has notice that the evidence is relevant to the litigation or when a party should have known that the evidence may be relevant to future litigation." What is proper notice, when the obligation arises, what evidence is really relevant, and what constitute reasonable steps to preserve evidence are the subjects of many, many court opinions.

In a case out of Tennessee, a General Contractor filed suit against an Owner for claims arising out of deficient plans and specifications that had resulted in over 2000 RFI's during the course of the project. The Owner counterclaimed for liquidated damages. During the course of litigation, the General Contractor discovered, while looking in a trash can at the Owner's office, that the Owner appeared to be destroying documents related to the case. After further investigation, the General Contractor learned that the Owner had allowed its employees to destroy several thousand documents. It further learned that the Owner's project manager kept copies of documents upon which he made notes of his impressions and opinions, but that he had thrown these out. All of these incidences of document destruction occurred after the initial lawsuit was filed. The Court found that the Owner obviously had notice to preserve documents that may be relevant to the litigation because they were in litigation. Further, the destroyed documents were likely relevant as some were kept by the owner's project manager for the project and attempts to reconstruct destroyed documents indicated that they were related to the project. The Court sanctioned the Owner, ruling that the jury could infer that the Owner was destroying documents that were damaging to the Owner's claims and defenses. It also ordered the Owner to reimburse the General Contractor for its legal costs related to this issue. The Court stated "it was incumbent upon the City to establish a procedure that would eliminate the likelihood that potentially relevant documents would be destroyed. Alternatively, the City should have taken control of all documents and had a lawyer examine the documents before they were destroyed."

The "take-away" from this case is the extent of the duty to preserve when construction claims exist related to the project. In this instance, the Owner clearly did not monitor the activities of its employees and probably did not consider the copies of documents retained by its job site personnel, i.e., its project manager. By failing to prevent their destruction, the Owner was placed in the position of appearing to have engaged in a "cover up."

For more information, contact Matthew G. Hjortsberg.