Idaho Land Law

A Blog Discussing Current Issues of Land Use, Real Estate, and Construction Law in the State of Idaho.

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Construction Arbitration Award May Not Always Bar Participants' Future Lawsuits

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Today’s blog post focuses on an opinion from the Sixth Circuit Court of Appeals dealing with arbitration and the ability to have a “second bite at the apple” after an arbitration award. There has been a lot of discussion of this case recently on construction forums and I thought Idaho Land Law blog readers would be interested. While this case comes to us from Michigan, it does raise some questions for construction contractors in Idaho.   

The case, W.J. O’Neil Co. v. Shepley, Bulfinch, Richardson, et al., has your usual players, an owner, construction manager, subcontractor, design professionals, and of course a large claim for design errors and mismanagement of the project. Typical construction case… what is not typical is the Sixth Circuit’s holding.    

After losing millions of dollars because of delays and coordination failures in building a hospital, W.J. O’Neil Company sued its construction manager, Barton Malow Company, in Michigan state court. The two ended up in arbitration. Shepley, Bulfinch, Richardson & Abbott, Inc., the project’s architect, and Smith Seckman Reid, Inc., the project’s MEP design professional, (additional defendants in this case), were added to the arbitration on indemnity claims. 

In the arbitration, O’Neil did not formally assert claims against Shelpley or Reid despite the fact that O’Neil’s claims against Barton Mallow arose from Shelpley and Reid’s alleged defective and inadequate design of the hospital. O’Neil won the arbitration against Barton Malow. Barton Malow lost on its indemnity claims against Shelpley and also against Reid. And no party sought judicial confirmation or review of the arbitration award.

After winning its arbitration claims, O’Neil then sued the design professionals, Shelpley and Reid, in federal court. The federal district court dismissed O’Neil’s claims, finding them barred by Michigan’s doctrine of res judicata. The Sixth Circuit  found the district court’s conclusion in error and held an arbitration award cannot bar a claim that the arbitrator lacked authority to decide.  

The Sixth Circuit went on to state that an arbitrator lacks authority to decide a claim that the parties did not agree to arbitrate. In this case, the Court found that O’Neil did not agree to arbitrate its claims against the design professionals and only agreed to arbitrate its claims against the construction manager, Barton Mallow. The Court reversed the district court’s orders, vacated the judgment, and remand for further proceedings.

The Court focused on the arbitration flow-through provisions of the contract between O’Neil and Barton Mallow. The defendants argued that O’Neil agreed to arbitrate its claims against the defendants in its contract with Barton Mallow. The defendants also pointed to the contract between Barton Mallow and the owner, which required arbitration of all claims between the owner and any member of the construction team.  The Court found that O’Neil was not required to arbitrate its claims against the defendants simply because it “had an arbitration agreement with one company, that company had arbitration agreements with the defendants, and disputes among the parties arose from the same circumstances.”  The Court called the legal reasoning behind this… “the contagion theory of arbitration” and stated it “has no basis in law or the relevant contracts.”       

So what are some practice tips for those wanting to arbitrate all disputes on construction projects?  First, a thorough review of all arbitration flow-through provisions in your construction contract is essential to making the argument that everyone consented to arbitration.  Second,  have the award confirmed by the court immediately after it is issued by the arbitrator.  These two steps may prevent a party from having a “second bite at the apple” after completing arbitration.    

Understanding Bonds and Risk Allocation for Construction Projects

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@depositphotos-rudall30

On any construction project, bonds should be considered as part of the owner’s or general contractor’s strategy for risk management or risk allocation.  Bonds are separate and apart from the types of insurance generally found on construction projects (builder’s risk insurance, commercial general liability, workers compensation/employer’s liability, and umbrella coverage), but none-the-less they can be equally as important to the success or failure of any project.

There are a wide variety of bonds available for constructions projects.  Whether or not a particular type of bond is applicable for the construction project is often driven by either statutory requirements, in the case of public construction projects, or the owner’s requirements in the case of private construction projects.  Below is a brief description of the types of bonds available in the market place and generally found on a construction project.

On some projects, a bid bond may be requested by either the owner or the general contractor.  The entity requesting the bid bond is referred to as the “obligee” and the bid bond runs to the obligee’s favor.  The purpose of the bid bond is to ensure that the general contractor or the subcontractor will honor its bid and perform the work contemplated in the construction contract once the contract is awarded.  Should the contractor or the subcontractor refuse to honor its bid, then the obligee can make a claim against the surety for the sum of the bond or difference between the contractor/subcontractor’s bid and the next highest bid on the project (whichever is less). 

Payment bonds are meant to ensure that subcontractors and suppliers are paid on the construction project.  The general contractor or a subcontractor may be required to post a payment bond on the project.  In general, most public construction contracts require payment bonds.  Many private construction project owners will require payment bonds to help ensure that payments are being made to subcontractors and suppliers.

Performance bonds are meant to ensure that the contractor or subcontractors complete the project in accordance with the plans and specifications outlined in the contract documents.  If the contractor fails to complete the project in such a manner, then the “obligee” (often the owner) can make a claim against the surety, up to the amount of the bond, to complete the project.  These too are often required in public construction projects.

Construction contracts generally always have some type of warranty provisions.  The length of the warranty provisions can vary by contract but there are bonds available to protect owners from a contractor’s failure to honor its warranties.  These bonds are called maintenance bonds.  A maintenance bond offers some level of protection (depending on the amount of the bond) that the contractor will honor its warranties and ensure that the project is functioning as intended.

One other type of bond typically encountered on the construction project is a retention bond. The purpose of a retention bond is to allow for the removal of retainage requirements in the construction contract or the release of retainage on the construction project to contractors and/or subcontractors in return for the retention bond.  Should the contractor or subcontractor fail to complete the project in accordance with the contract or fail to pay its suppliers, then the obligee can make a claim against the retention bond. 

These are few of the commonly found bonds on a construction project.  Whether these types of bonds are appropriate for your project is driven in part by cost, risk tolerance, and whether the project is a public or private.  A take away from this post is that bonds should not be considered as a stand alone product and must be incorporated into every owner and contractor’s strategy for risk management. In upcoming posts we will explore how and when to make a bond claim, which can be just as important as purchasing bond coverage in the first place.    In addition, we will also explore Idaho's Mechanic's Lien Release Bonds.  

 

Mechanic’s Liens in Idaho – How long before I lose my right to lien a project?

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There are a few things you should know as a contractor, sub-contractor, or a material supplier doing work in Idaho. Probably the most important is that contractors are required to register in Idaho prior to doing work. Failure to register is a misdemeanor that may result in a fine but more importantly an unregistered contractor loses its rights to pursue legal remedies. I cover this topic in a blog post on Idaho’s Contractor Registration Act.  

The second most important topic is the deadline to file a mechanic’s lien. In Idaho, a mechanic’s lien must be filed within ninety (90) days after the completion of labor or services, or the furnishing of materials for project. This is a statutory deadline and failure to timely file results in a loss of your mechanic’s lien rights. Now that doesn’t mean you are without recourse, you could always sue for breach of contract but the ability to go after the underlying real property for payment… is waived. 

You must include the following in any Idaho mechanic’s lien claim:

(a) A statement of the claimant’s demand, after deducting all just credits and offsets;

(b) The name of the owner, or reputed owner, if known;

(c) The name of the person by whom he was employed or to whom he furnished the materials; and

(d) A description of the property to be charged with the lien, sufficient for identification.

In addition, a mechanic’s lien claim must also be verified by the oath of the claimant, his agent or attorney.  And a true and correct copy of the lien must be served on the owner of the property either by delivering a copy personally or by mailing a copy by certified mail to the owner at his last known address. The delivery or mailing of the lien claim must be made no later than five (5) business days following filing the lien.

As a practical tip, I prefer that the owner is served by a process server.  My reasoning for paying a little extra for personal service is that I can include the process server’s affidavit in the action (lawsuit) to enforce the mechanic’s lien.  Remember that you must file your mechanic’s lien lawsuit within six (6) months after the mechanic’s lien is filed.

Mechanic’s liens are an integral part of any contractor, sub-contractor, or material suppliers’ business payment strategy. As part of that business strategy, my suggestion is to calendar seventy (70) days after the last date labor or materials were supplied to a project and if payment is not received by that deadline, then begin preparing your mechanic’s lien. Calendaring these dates will ensure you do not miss the ninety (90) day deadline to file your mechanic’s lien and will also give your attorney time to help you with the process. 

Introducing Idaho Land Law blog’s Hall of Shame… “Florida Woman Bulldozes Neighbor’s Mobile Home”

We at the Idaho Land Law blog have started a special section called the “Hall of Shame.” This new section is dedicated to discussing the most outrageous land-use, real estate, and construction stories in the news.  Hopefully you will enjoy these updates as much as we do.

Our initially entry comes to us from St. Augustine, Florida where Ms. Ana Maria Moreta Folch is alleged to have hired a contractor to bulldoze her neighbor’s mobile home. Yes, you are reading this correctly. A number of news organizations from around the country have picked this up but I particularly like the reporting from the New York Daily News.

© Depositphotos.com - Zenpix.jpg

© Depositphotos.com - Zenpix.jpg

The story unfolds with Ms. Folch allegedly convincing a contractor to bulldoze her neighbor’s mobile home by showing him a key to the house. According to the news reports, the victim of the “bulldozing” returned to find her mobile home completely destroyed.  Ms. Folch was subsequently questioned, arrested, and charged with criminal mischief in the case. The damages are estimated at $26,000. 

Yes, this case is outrageous and entertaining but it also provides a couple of teaching moments for those in the land use arena:

First:  Never underestimate how people will react in a neighborhood dispute.  

This is an extreme case and worthy of the Hall of Shame but it is also illustrative of what can happen when neighbors begin behaving irrationally.  I recently was approached concerning a neighborhood dispute where an adjoining property owner was patrolling their property line with firearms and ATVs.  My initial reaction was to tell the individual that there might not be a legal solution to the matter and that they should consider moving.  The point is that some of these situations can become dangerous and that often there is not a legal solution for dealing with unhappy neighbors.  

Second:  Contractors should investigate ownership before beginning work. 

There are a number of reasons for contractors to make sure they are dealing with the owner.  Chiefly, you want to be paid for your work but also you want to make sure you will not be sued for performing work (or demolition) on someone else’s property.  A typical situation could involve performing work at the direction of a tenant instead of an owner.  The tenant may not have the authority to authorize the work and may not have the ability to pay for the work once it is completed.

We will continue to post new updates to the Hall of Shame.  If you have any stories you feel may be worthy, please let us know.  And remember… be careful who has your house key.

Why your Thanksgiving Meal is Really A Construction Project

It is that time of year and I am again thinking about how hard it must be to get everything right in the kitchen on Thanksgiving. Shopping for the food, cooking it, setting the table, dealing with relatives, and of course, cleaning up.  Kudos to anyone who has wrestled with this task. Our Country thanks you for your service-without you, we would be France.

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After some consideration of how much work goes into the Thanksgiving meal, I realized it is just like any other construction project. All the key players are on the site, but we know them by different names. Planning and understanding your workforce are the key components to a successful Thanksgiving feast.

Owner

In my family, the owner of the Thanksgiving meal project is my father. He wants to have the Thanksgiving meal “substantially completed” on or before noon. This will allow him plenty of time to watch football after the meal, take a nap, and eat a second meal sometime in the afternoon. In your family, the owner of the Thanksgiving meal project may be someone else but generally they all have the same criteria: DELIVER THE PROJECT ON TIME AND ON BUDGET!  I would suggest reading any contract entered into with the Owner as it is likely to contain liquidated damages provisions should you fail to timely deliver.

General Contractor

The general contractor of the Thanksgiving meal project is likely married to the owner. In my house there are never any bids accepted on the project and it is just assumed my mother will be awarded the contract. In her role as general contractor, she will order materials from local suppliers (Hy-Vee is where she does her trading) and she will engage subcontractors to complete various portions of the meal. 

Subcontractors

The subcontractors generally consist of my aunts or my sisters. Sometimes a subcontractor will be an unrelated guest but they are generally only awarded small contracts (i.e. bring a relish dish or a bottle of wine). I imagine that at one point my mother was a subcontractor for her mother on the annual Thanksgiving meal project but her responsibilities have grown over the years and she is now running her own project.

There is a list of approved subcontractors. This list is not necessarily written down but it is known within the “industry” about which subcontractors can be trusted to deliver. Because so much of the Thanksgiving meal relies on timing, it is imperative that only approved subcontractors be used on the project. A subcontractor that shows up late with the “green bean casserole” or “pumpkin pie” can ruin the entire project’s delivery and upset the owner. Not a good thing, even if there are no liquidated damages on the project.

Construction Manager

My mother also acts as the construction manager. She works at coordinating the different trades (see subcontractors above) to ensure that that the hot dishes have the appropriate oven space, that those subcontractors needing stove time have access, and that the desserts are staged in a guarded area away from my nieces (look for a separate blog post on construction site theft in the coming months).

Design Professionals

My family has been working off an old set of plans for the Thanksgiving meal feast. These plans were drawn up in 1621 by the Pilgrims at Plymouth and fortunately for us, the architects/engineers of those plans transferred all rights in those “instruments of service” to the people of the United States of America. Thanks architects and engineers!

Change Orders

No construction project would be complete without change orders and the Thanksgiving meal project is no different. I can tell you from personal experience that change orders will not be approved by either the Owner or the General Contractor in my household.

One year my brother and I decided that we would deep fry a turkey for the Thanksgiving meal project. We presented a “submittal” to the general contractor, with the requested change order but were summarily rejected. The reasoning was as follows: (1) we were not “approved” subcontractors and couldn’t be trusted to deliver on time; (2) even if we became “approved” subcontractors our insurance policy limits could not cover the inevitable turkey fryer fire (lack of bonding capacity); and (3) the “deep-fried” turkey did not match the plans and specs developed in 1621. Apparently, only an oven-baked turkey would satisfy the Owner. Unbelievable. If you have ever tasted a deep-fried turkey, you know this is an acceptable substitute for an oven-baked turkey.

Please enjoy your Thanksgiving meal feast and remember to thank all the owners, general contractors, and subcontractors in your life that make Thanksgiving such a special day. 


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