Defective Specifications

A recent Federal Circuit case underscores a contractor's rights to equitable adjustment when the owner provides defective specifications. In this case, the contractor made a claim for a constructive change as a result of having to proceed under what it contended were omissions in the specifications. The Government took the position that since the specifications were defective the contractor should not have relied upon them. Citing to well established precedent, the trial court had expressed that

"[w]hen the government provides a contractor with defective specifications, the
government is deemed to have breached the implied warranty that satisfactory
contract performance will result from adherence to the specifications, and the
contractor is entitled to recover all of the costs proximately flowing from the
breach."

The Government also argued that the Contractor should have discovered the defect during the bid. However, this argument was rejected as well because discovery of the error would have required a calculation that a contractor making a bid would not reasonably be expected to make.

The Federal Circuit affirmed, and stated that the defective specifications made performance "impracticable," creating a constructive change that entitled the contractor to equitable adjustment.

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

Mechanic's Lien Notice Language

In response to more questions regarding Mechanic's liens we have cut and pasted the standard notice of lien form lifted from the Maryland Annotated Code. Remember, this notice must be sent registered or certified mail, return receipt requested, to the Owner. It can also be personally delivered to the Owner. If notice cannot be accomplished by these means, it can be posted on the property.

Notice to Owner or Owner's Agent of Intention to Claim a Lien

........................................................(Subcontractor) did work or furnished material for or about the building generally designated or briefly described as .................................................The total amount earned under the subcontractor's undertaking to the date hereof is $ .................... of which $ .................... is due and unpaid as of the date hereof. The work done or materials provided under the subcontract were as follows: (insert brief description of the work done and materials furnished, the time when the work was done or the materials furnished, and the name of the person for whom the work was done or to whom the materials were furnished).

I do solemnly declare and affirm under the penalties of perjury that the contents of the foregoing notice are true to the best of the affiant's knowledge, information, and belief. ............................. (Individual) on behalf of ................................ (Subcontractor) (Insert if subcontractor is not an individual)"

Timing For Filing a Mechanics’ Lien

Timing is an important aspect when a contractor or sub-contractor wants to obtain a mechanics’ lien on a property to secure the owner’s unpaid obligation.

Based on a number of questions from readers regarding the time for filing a mechanics’ lien, we wanted to clarify the time frame in which a party must act to secure payment for labor or materials supplied by a contractor or general contractor in the improvement of real property.

Contractors must file a petition to enforce a mechanics’ lien within 180 days from the last day any work was performed on the project. Subcontractors, however, have an additional hurdle before filing a petition. A subcontractor must first provide written notice to the owner of the property by registered or certified mail, return receipt requested within 120 days from the last day of any work performed on the project. Notice also may be given by posting on the door of the property if the subcontractor is unable to serve the owner by mail. A subcontractor who fails to meet this requirement will be barred from obtaining a mechanics’ lien.

Contractors and subcontractors wishing to file a mechanics’ lien also must provide information regarding ownership of the property, the property itself, and the project. Specifically, a petition for a lien must contain the name and address of the owner of the property; a detailed description of work provided and materials furnished; a statement that the construction is either new construction or a statement that work increased the building’s value by at least 15%; the specific dates work was completed or the materials were furnished; the name of the person or company for whom work was performed or materials furnished; the total amount claimed; and a description of land and description of building. Further, the petition must include all relevant material papers and an affidavit from the petitioner that sets forth the facts upon which the petition for a lien is based. The failure to meet any of these requirements may cause the dismissal of the petition.

Any contractor or subcontractor considering a mechanics’ lien should start as early as possible on the extensive preparation required to meet the close filing deadlines. Otherwise, this important means of securing a claim for work performed will be lost as to that work.

For further information on this subject please contact Michael Siri at 410-583-2400.

Proposed 2007 AIA Contract Changes

Important Potential Changes to the 2007 AIA Contract Affecting Contractors and Subcontractors

The American Institute of Architects (“AIA”) is preparing revisions to key contract documents that have remained unchanged since 1997. The changes are expected to be published in October of 2007, and the anticipated changes to AIA A201-2007 contain large impacts to both general and subcontractors, some of which are summarized below:

Payment Procedures

Under the new A201-2007, contractors must pay subcontractors “no later than seven days after receipt of payment from Owner” (the current A201-1997 requires the contractor to “promptly pay” but does not define what “promptly” means). Another benefit to subcontractors is a new provision of A201-2007 that entitles owners to request written confirmation from the contractor evidencing payment to the subcontractors. If the contractor does not reply in 7 days, the owner may contact the subcontractors directly. A201-2007 also provides that when certification of payment is withheld by the architect, the owners may contact subcontractors to ask about the payment status, and make joint check payments, if necessary.

Insurance Coverage

The revised contract requires contractors and subcontractors to carry additional insurance coverage. This may result in higher costs, greater risk, and more exposure to claims and loss to the subcontractor.

Financial Assurances from Owners

The 2007 contract revisions also place new limitations on a contractor’s ability to request financial assurances from the owner after work has commenced. This is reflected in a change to the owner financial arrangement disclosure requirement.

IDM

While the Architect remains the default Initial Decision Maker (IDM), the revised 2007 contract provides that “unless otherwise indicated in the agreement” the Architect can be replaced by an IDM, which diminishes the Architect’s role in the dispute resolution process. The IDM reviews claims within ten days of receipt of a claim, acting as a third-party neutral in disputes between the owner and contractor or other parties. The initial decision is final and binding, unless a party seeks to appeal the IDM’s decision via mediation, arbitration, or litigation.

Arbitration and Litigation

The revised 2007 contract will no longer specify mandatory arbitration as a means of dispute resolution, but will permit parties to elect either arbitration or litigation after unsuccessful mediation. If no selection is made, litigation is the default.

Limits on Consolidation and Joinder

In 2007, consolidation and joinder will be made easier in arbitration. The Owner and Contractor may consolidate arbitrations if certain conditions are met. Other arbitrations can be consolidated at the election of the party whose arbitration is consolidated. There no longer is a requirement that there be consent of the architect or contractor for a subcontractor to be joined in arbitration involving the owner; therefore, the 2007 AIA increases a subcontractor’s risk of being joined in arbitration.

Contingent Assignments

The new A201 will provide greater protection for subcontractors in the event of termination of the prime contract. The revised document provides that, if the owner accepts the assignment of a subcontractor agreement, the owner assumes the contractor’s rights and obligations under the subcontract. The owner may then assign the subcontractor to a successor contractor or other entity.

Again, these changes to the key AIA contract documents have not yet taken effect, but updated information about these proposed changes and their pending adoption will be available on the new Bowie & Jensen construction law blog, at www.mdconstructionlaw.com/.

For more information on this subject, please contact Michael W. Siri.

Damages for reduced bonding capacity

In a recent California case, a general contractor was awarded damages for the owner's breach of contract. Significantly, however, a portion of the damages award was measured by the general contractor's lost profits resulting from its reduced bonding capacity. The owner had terminated that contractor and then entered into a takeover agreement with the general contractor's bonding company. The bonding company then sued the general contractor. As a consequence of this dispute with its bonding company, the general contractor's bonding capacity was reduced from 3 to 4 million per job and 6 to 7 million in the aggregate to $500,000 per job and $500,000 in the aggregate.

Although it is somewhat unclear from the Court's opinion, it seems that the Court found that the Owner had improperly terminated the general contractor and sought a replacement contractor through the bonding company. This termination was a breach and the Court concluded that the general contractor had put on sufficient evidence to demonstrate that when a contractor is placed in a position of dispute with its own surety it will have significant difficulty acquiring bonds. The general contractor demonstrated its anticipated lost profits through an historical average and projecting its likely profits on the basis of that average.

While this case is decided under California law, the legal principles that form the basis of the opinion are entirely consistent with Maryland law. In short, there is no distinction between California and Maryland law on this subject that would preclude a contractor from making the same argument under Maryland law.

For any questions, contact Matt Hjortsberg. Hjortsberg@bowie-jensen.com - or 410-583-2400.