Public-Private Partnership Legislation May Be Limited to DRIC Bridge Project

Legislation to authorize public-private partnerships (P3) in Michigan (first reported here) may be limited to the Detroit River International Crossing (DRIC) project, according to a report in Crain’s Detroit Business.

Negligent Building Design, Expert Testimony Required to Establish

The Michigan Court of Appeals recently affirmed the rule that expert testimony  is required to establish negligent building design. This rule was outlined in Lawrenchuk v Riverside Arena, Inc, 214 Mich App 431; 542 NW2d 612 (1995):

“In the absence of expert testimony providing standards for evaluating the relevant risks and advantages of [a particular] design, a jury would be denied an objective framework by which to evaluate [the] plaintiff’s claim, thus precluding any genuine determination whether the design was unreasonable.”  Id. at 434. Therefore, a plaintiff’s negligent building design claim must be dismissed if not supported by expert testimony.  Id. at 436.

See, Tappen v. Carlton 54th L.L.C., (Mich. Ct. App. July 30, 2010). A copy of the slip opinion can be found here.

In Tappen, the Court of Appeals found that the trial court  had erred when it failed to grant summary disposition to the Defendant where the Plaintiff failed to present expert testimony in support of its claim of negligent design.

"It is well settled that a jury must not be permitted to speculate or guess whether a defendant has been negligent; nor may a jury be permitted to speculate concerning the causation of a plaintiff’s injuries. (citations omitted)  Because plaintiff failed to present expert testimony to support his claim that defendant’s hotel was negligently designed, the circuit court erred by declining to grant summary disposition in favor of defendant with respect to this claim."

Bill to Abolish Michigan Homeowner Construction Lien Recovery Fund Passes House

On June 16, 2010, H.B. 5830, and a series of companion bills that would abolish the Homeowner Construction Lien Recovery Fund, was passed by the Michigan House of Representatives by a 94-9 vote. The bill has been referred to the Senate Appropriations Committee.

As we noted in earlier posts (here and here), the Lien Fund is out of money, overwhelmed by claims, and without a legal mechanism to replenish itself. PA 497 of 2006 repealed Section 201(2) of the Construction Lien Act and eliminated the ability of the Fund to make a $50 special assessment when the Fund fell below $1 million. Instead, the Fund can only assess members a $10 annual renewal fee.

Update: H.B. 5830 was voted out of committee by the Senate Appropriations Committee on July 21, 2010. A vote by the full Senate is expected shortly.

Update: H.B. 5830 was approved and voted into law on August 23, 2010 as PA 147 of 2010 and given immediate effect.   

Legislation Creating Public Private Partnerships, to Enable the DRIC Advances

Legislation to enable the Detroit River International Crossing (DRIC) project, through the creation of Public Private Partnerships (P3) has been moving forward under two other bills, H.B. 4961 and H.B. 6128.   H.B. 4961 was approved by the Michigan House on May 26, 2010. 


Update: On September 8, 2010, Crain's Detroit Business reported (here) this legislation may be limited to the DRIC project as part of a legislative compromise.

LEED Legislation Profiled

The Hilger Hammond firm has posted an article (here) profiling S.B. 1111-1114 (2010), which were introduced in the Michigan Senate earlier this year. This legislation would  amend the Commercial Redevelopment Act (PA 255 of 1978), and would provide financial incentives for construction and renovation projects achieving LEED certification. 

Legislation Introduced to Prohibit Pay-When-Paid Clauses on Michigan Public Projects

On May 6, 2010, Senators Michael Switalski (D. Roseville)  and Dennis Olshove (D. Warren) introduced S.B. 1319, which would prohibit a surety’s reliance on a “pay-when-paid” clause in defense of payment bond claim. 

Specifically, S.B. 1319 would amend Section 3 of the Public works bond statute (MCL 129.201, et seq) by adding the following prohibition:

(2) A payment bond for a contract executed on or after the effective date of the amendatory act that added this subsection shall not contain any provision that conditions the payment of the subcontractor upon the receipt by the contractor of its money from the governmental unit.

S.B. 1319 would also add a fee-shifting, and interest provision in Section 7 for the prevailing party:

(6) In any action brought under this section, the prevailing party is entitled to recover from the nonprevailing party the reasonable costs and attorney fees incurred in the action. If, in such an action, the finder of fact determines that there was no good faith basis for the nonpayment of the amount sought by the claimant, the claimant is entitled to recover interest at the rate of 12% per annum on the amount found to be due by the finder of fact from the date that payment was due until fully paid.

Note: Michigan is among a small minority of states that uphold the use of "pay-when-paid" or so-called "pay-if-paid" clauses. The controlling case is  Berkel & Co v Christman Co, 210 Mich App 416 (1995).

Personal Liability under the Michigan Builder’s Trust Fund Act, Michigan Court of Appeals Affirms

Proof that a corporate officer personally misappropriated contract proceeds “is not necessary to find an officer liable” for a violation of the Michigan Builder’s Trust Fund Act (MCL 570.151, et seq).  

“[A] reasonable inference of appropriation arises from the payment of  construction funds to a contractor and the subsequent failure of the contractor to pay laborers, subcontractors, materialmen, or other entitled to payment.”  

So declared the Michigan Court of Appeals recently in BC Tile & Marble Co v Multi-Bldg Co., 2010 Mich App LEXIS ____ (Mich Ct App, April 13, 2010) (slip opinion), another decision affirming the principal (and risk) of personal liability for the owners of construction companies under the Michigan Builder’s Trust Fund Act (MBTFA).

In BC Tile, the defendant general contractor built and sold a condominium to a homeowner.  Although the contractor received funds at the closing for Unit 5 to pay his tile and marble subcontractor, the contractor failed to pay the subcontractor citing defective workmanship and delayed performance.  The subcontractor, who had recorded and served a construction lien four days prior to the closing, then filed suit to foreclose his lien, and included a claim against the contractor’s president, in his individual capacity, for violation of the MBTFA. As indicated in an earlier posting to this blog, this fact pattern is fairly typical. 

The MBTFA provides that upon receipt of payment from the owner, a trust is created for the benefit of contractors, laborers, subcontractors and suppliers, and makes the contractor or subcontractor who receives the payment a trustee of the funds.  The MBTFA is a criminal statute, but the courts have also recognized a civil cause of action under common law. To make out a civil cause of action under the MBTFA, a plaintiff must establish the following elements:  

• The defendant is a contractor or subcontractor engaged in the building construction industry, 
• The defendant was paid for labor or materials provided on a construction project, 
• The defendant retained or used those funds, or any part of those funds, 
• The funds were retained for any purpose other than to first pay laborers, subcontractors, and materialmen, and  
• The laborers, subcontractors and materialmen who were engaged by the defendant to perform labor or furnish material for the specific construction project.

See, Livonia Bldg Materials Co v Harrison Construction Co, 276 Mich App 514, 519 (2007). See also, DiPonio Construction Co v Rosati Masonry Co, 246 Mich App 43, 49; 631 NW2d 59 (2001), lv app denied, 465 Mich 896 (2001).

In BC Tile, plaintiff asserted that the president of Muti-Bldg Co. was personally liable because he had signed the closing documents that allowed payment to other contractors, but not BC Tile & Marble Co. The president denied that he had had any day-to-day involvement with or exercised any decision-making for the particular construction project. He further denied that he had personally received any of the funds at closing.

While the Court of Appeals agreed that “there is no evidence here that [the president] personally used the funds owed to BC Tile,” it found that this was not dispositive of the MBTFA claim.

First, the Court reiterated its decision in the appeal of a criminal prosecution under MBTFA:  “there is no requirement that contract payments be made directly to the officer of the corporate contractor in order to hold the officer individually responsible under the MBTFA.”  People v Brown, 239 Mich App 735, 743-744 (2000).

Second, relying on a 2007 decision involving civil claims, the Court of Appeals noted:

“In Livonia Bldg, the defendant contractor received funds for a project but did not pay the plaintiff in full. The corporate officers gave testimony regarding their decision to put the funds received in various accounts and subsequently, their actions in writing checks to entities other than the plaintiff. This Court found that the individual corporate officers ‘acted in direct contravention of the MBTFA.’ According to this Court, there was sufficient evidence to create a presumption of misappropriation and to find the corporate officers individually liable.”

The Court of Appeals concluded that the president of the construction contractor should not have been granted summary disposition, and reversed the trial court’s ruling. The corporate officer thus faces a trial and possibly a personal judgment.

Not addressed in the Court’s decision, but another significant issue for individual defendants, is the impact a trust fund claim may have on a personal bankruptcy. Since the statute is predicated on the existence of a trust, a violation of the MBTFA is also breach of the (contractor) trustee’s fiduciary duties. Under Section 523(a)(4) bankruptcy code, fraudulent conduct while acting in a fiduciary capacity (defalcation) is one of the specified grounds for excluding a claim from discharge. Said another way, a Builder's Trust Fund Act claim is a debt that can survive a bankruptcy when most other claims are discharged.
 

Comment: To avoid personal liability issues, contractors must take care in these turbulent economic times to address shortfalls in payment with subcontractors and suppliers by securing waivers and releases that include officers and shareholders, especially when making compromise payment agreements, and documenting the reasons for non-payment to subcontractors and suppliers where facts and circumstances warrant the withholding of payment. 

  
For More Information

Since the facts of each case are unique, this case summary should not be taken as legal advice. For more information about the Michigan Builder's Trust Fund Act, and how it might affect you personally or your business, please contact Peter Cavanaugh or visit our website at www.MichiganConstructionLaw.com. 

Update: The Michigan Court of Appeals decided June 8, 2010 to publish this decision.  A full citation will follow. 

ARRA Money Creates Pitfall for Contractors Bidding on Detroit Public Schools Construction Program

Following voter approval last November of Proposal S, the Detroit Public Schools (DPS) is currently embarking on an ambitious program to construct 8 new high schools and renovate another 10 schools over the next three years.

Approximately half of the money raised by the Detroit Public Schools for its new $500 million school construction and renovation program is coming through the federal Qualified School Construction Bond (QSCB) Program. This is a new tax credit program created by the American Recovery and Reinvestment Act (ARRA).

Projects funded with bonds under the QSCB program, however, must comply with all ARRA provisions.  Pursuant to the ARRA, Division B, Section 1601, Davis-Bacon labor standards must be applied to projects financed with the proceeds of Qualified School Construction Bonds.

Warning! The inclusion of federal labor standards in the DPS School Construction program creates a trap for the unwary contractor who wants to hire "Pre-Apprentices" or "Student Pre-Apprentices" or "Assistants."

Here’s why --

 
Section 11-3 of the Project Labor Agreement (PLA) for the DPS School Construction program requires that contractors commit to a goal that apprentices will perform 25% of total craft hours on a craft-by-craft basis.  In addition, 75% of the apprentice and pre-apprentice hours must be performed by Bona-Fide City Residents. Up to 15% of the 75% apprentice hours can be performed by "Pre-Apprentices."

The PLA also requires in Section 11-9 that Contractors participate in the City’s BEST Program, which is designed to create employment opportunities for students 16 to 25 years in age. These students are considered “Assistant” or “Pre-Apprentice” and must work under the direction of a skilled construction mechanic or construction professional. 

The Problem:  Federal Davis-Bacon labor guidelines recognize ONLY journeymen and registered apprentices. There is no classification for a Pre-Apprentice or Student Pre-Apprentice or Assistant. 

These classifications are not recognized as Apprentices and contractors could be forced to pay Journeyman rates for an employee working in these classifications  if they are not part of an bona fide apprenticeship program, one that is recognized by the U.S. Department of Labor Wage and Hour Division.  Quoting from the applicable federal regulations --  

(4) Apprentices and trainees--(i) Apprentices. Apprentices will be permitted to work at less than the predetermined rate for the work they performed when they are employed pursuant to and individually registered in a bona fide apprenticeship program registered with the U.S. Department of Labor, Employment and Training Administration, Office of Apprenticeship Training, Employer and Labor Services, or with a State Apprenticeship Agency recognized by the Office, or if a person is employed in his or her first 90 days of probationary employment as an apprentice in such an apprenticeship program, who is not individually registered in the program, but who has been certified by the Office of Apprenticeship Training, Employer and Labor Services or a State Apprenticeship Agency (where appropriate) to be eligible for probationary employment as an apprentice. The allowable ratio of apprentices to journeymen on the job site in any craft classification shall not be greater than the ratio permitted to the contractor as to the entire work force under the registered program. Any worker listed on a payroll at an apprentice wage rate, who is not registered or otherwise employed as stated above, shall be paid not less than the applicable wage rate on the wage determination for the classification of work actually performed. 

Cite: 29 CFR 5.5(a)(4)

Several trade contractors who worked on the Book Cadillac Hotel project last year got caught in this trap and were forced to pay journeymen wages to employees they thought were  “apprentices” but who turned out not to be part of a bona fide registered apprenticeship program. I recently learned of another contractor working a HUD project that encountered the same problem.

The Solution(?): Sorry, but there is no easy solution to this problem. The Detroit Public Schools is aggressively promoting inclusion of Detroit businesses and employment of Detroit residents in its school construction program. The DPS also wants to extend employment opportunities to students and other young people who are not part of a registered apprenticeship program. This is a laudable goal, but it may come at a significant cost.

Contractors who plan on bidding under the DPS School Construction Program would appear to have two choices:  (1) add money to their bids and plan on paying journeyman wages to students (pre-apprentices, assistants), which will inflate the cost of construction, or (2) risk paying back wages and other penalties when the matter is flagged during an audit of their certified payroll records. There is little doubt that DPS will be watching this element of the program. During a presentation to the AGC of Michigan on April 22, 2010, Kevin White (DPS Director of Procurement for Capital Improvements) outlined at least three layers of scrutiny that contractors will face. 

If you have questions, or would like a copy of the PLA, please contact Peter Cavanaugh at pcavanaugh@cqlawfirm.com or call him at (248) 543-8320.  

Update: The U.S. Department of Labor Wage and Hour Division has a web page (here) devoted to the application of federal labor standards to ARRA funded projects. 

Further Update: On or about April 30, 2010, the DPS issued Addendum No. 6  to the Martin Luther King Senior High School  bid package, which will be the first project bid on May 12, 2010. Addendum No. 6 finally provided bidders with the  form of agreement and terms and conditions that DPS will be using for all of  its design-build contracts under the $500.5 million bond program. DPS terms and conditions recite, almost verbatim, the Davis-Bacon language quoted above (29 CFR 5.5(a)(4)). DPS also requires that the design-build (prime)  contractor incorporate these labor standards into all their subcontracts. 

New Bills Would Abolish Michigan Homeowner Construction Lien Recovery Fund

Just a few months ago, we reported that the Michigan Homeowner Construction Lien Recovery Fund was almost out of money and had no means to replenish its depleted coffers without action by the Michigan Legislature. I expected something to happen, but not this.

On February 17, 2010, Rep. Richard Hammel (D. Mt. Morris Twp) and Rep. Fred Durhal  (D. Detroit) introduced a series of connected (tie-barred) bills -- H.B 5830, H.B. 5831, H.B. 5832, H.B. 5833, H.B. 5834, and H.B. 5835 -- that would abolish the Lien Fund and delete references to the Fund from a variety of related states, but not fix the broken funding mechanism.

•  H.B. 5830 would repeal Sections 201 to 207, 303, and 304 of the Construction Lien Act (MCL 570.1201 to 1207, 1303, and 1304), which established the Homeowner Construction Lien Recovery Fund, and related administration and funding.
• H.B. 5831 would strike references to the Lien Fund from the Electrical Administrative Act (MCL 338.883b, et seq), which governs licensing of electrical contractors.
• H.B. 5832 would strike references to the Lien Fund from the Forbes Mechanical Contractors Act (MCL 338.976, et seq), which governs licensing of mechanical contractors.
• H.B. 5833 would remove references to the Lien Fund from the  State Plumbing Act (MCL 338.3531, et seq), which governs licensing of plumbing contractors.
• H.B. 5834 would amend the Michigan Occupational Code (MCL 339.2404, et seq), to remove references to the Lien Fund, including removal of enforcement provisions for residential builders who fail to pay a lien claim that resulted in payment from the Lien Fund. While the Bill does not significantly affect the remaining enforcement provisions , but removing the Lien Fund significantly weakens enforcement of complaints against residential builders who don't pay their subcontractors and suppliers resulting in residential liens. The complaint procedure against residential builders is a notoriously slow and ultimately unsatisfactory process.
• H.B. 5835 would amend the Michigan penal code (MCL 777.15b) to reflect repeal of the Michigan Homeowner Construction Lien Recovery Fund.

I'll update this posting as soon as I can determine the rationale for these bills, but I think that homeowners are the ultimate losers if this bill becomes law.

Update: The Detroit Legal News picked up on this story in its March 15, 2010 issue (here).  Apparently, the Michigan Association of Home Builders and the State of Michigan DELEG are behind this legislation. And a lack of political will to confront the problem (money) is the driving factor:

“The problem with the fund is that it is supported by fees that builders pay but those fees are at the same level they were 30 years ago,” said [Rep. Richard] Hammel [D-Mt. Morris Twp]. “No one wants the fees raised and if we keep them at the level they are, we can’t possibly pay for the fund with inflation.”

Update: H.B. 5830 was approved and voted into law on August 23, 2010 as PA 147 of 2010 and given immediate effect.  

AGC of Michigan Contruction Law, Upcoming Seminars

In addition to its upcoming Construction Law Webinar Series, AGC of Michigan is presenting its annual Professional Development Day on March 5, 2010 at the VisTaTech Center in Livonia. There will be 7 sessions divided into two tracks.  For more information or to sign-up and attend contact the AGC of Michigan at (517) 371-1550, or click here:   

Track 1: Becoming Incident and Injury Free

> Session I: Transform Your Safety Culture

> Session II: Safe Start

> Building a Winning Team

Track 2: Sell Yourself-Sell Your Company

> Session I: Successful Projects through Effective Project Controls (*)

> Session II: Failure or Success/How Do You Define Success?

> Session III: It's Not What I Say - It's What I Do

> Session IV: Social Networking - the Newest Tool in Your Toolbox

(*) Peter Cavanaugh, Cavanaugh & Quesada, PLC will be speaking on the legal aspects of project management topic, together with Joe Vanden Bossche, Navigant Consulting.

Michigan Homeowner Construction Lien Recovery Fund Runs out of Money

In a sign of the times, the Michigan Homeowner Construction Lien Recovery Fund is broke, and there is currently no way to replenish its coffers.

The Michigan Homeowner Construction Lien Recovery Fund (Fund) was created under Part 2 of the Michigan Construction Lien Act (MCL 570.1101, et seq) to provide protection when the homeowner, has in good faith, paid their licensed contractor for materials and labor and the contractor failed to compensate materialmen, subcontractors, and/or laborers.

The funding problem for the Fund stems from PA 497 of 2006,  an amendment to the Michigan Construction Lien Act, which repealed Section 201(2) of the Act effective January 3, 2007. This amendment, reportedly the product of a legislative compromise, eliminated the ability of the Fund to make a $50 special assessment when the  Fund fell below $1 million. Instead, the Fund can only assess members a $10 annual renewal fee.

Beginning in 2006 and continuing through July, 2009, the Fund experienced an unprecedented increase in claims. This increase closely mirrored the collapse of the housing market.  The Fund is currently involved in over 250 pending lawsuits involving more than 350 claims against it that total more than $18 million.  In 2009, Judgments against the Fund have averaged $123,800 per month.  By mid-October, there was only $524,000 remaining in Fund coffers.

On October 21, 2009, the Fund sought to consolidate all 250 of the pending lawsuits into one proceeding in Macomb County and proposed a pro rata distribution of the remaining money among all the lien claimants. The result would be pennies on the dollar.  The Fund’s (interpleader) motion was heard by Judge James Biernat, Sr. on November 2, 2009, but denied several weeks later in a written opinion.  

As things stand now, and absent legislative intervention, the Fund has advised that it will run dry within a few months. This will leave unpaid subcontractors and suppliers to fight things out with Homeowners, who  will find themselves stuck in the middle of dispute with their builder and at significant risk of paying twice for  improvements to their home.

For more information, contact Peter Cavanaugh or Gary Quesada, or visit their website -- http://www.michiganconstructionlaw.com/ 

Update: Michigan Lawyer's Weekly recently ran a piece about this issue in its February 1, 2010 edition. The cite, for any lawyers reading this, is 24 Mich. L.W. 265.

Cavanaugh & Quesada, PLC -- New Offices in Royal Oak

Attorneys Peter Cavanaugh and Gary Quesada have moved their  law practice to new and larger offices in Downtown Royal Oak at 1027 S. Washington Ave. Cavanaugh & Quesada, PLC serves the unique legal needs of the design and construction communities.

• Peter's practice is concentrated on business and construction law matters, including litigation, arbitration, and mediation of contract, construction lien and payment bond claims, and disputes involving owners, contractors, subcontractors, and suppliers. Peter also represents clients who specialize in water and wastewater construction projects, especially those projects involving the Detroit Water and Sewerage Department (DWSD).

• Gary's practice is concentrated on representing architects, engineers, owners and contractors in business and construction law matters, including litigation and arbitration of commercial, municipal and residential construction claims, copyright and risk management consultation. Gary also represents clients in the fields of photographic, sculptural, literary and film arts.

To find out how we can help you, please contact either Peter Cavanaugh or Gary Quesada at Cavanaugh & Quesada, PLC, 1027 S. Washington Ave., Suite A, Royal Oak, MI 48067, Tel: (248) 543-8320, Fax: (248) 543-8330 or for more information visit our website -- www.MichiganConstructionLaw.com

AGC of Michigan Announces Construction Law Webinar Series

As a follow-up to its October 30, 2009 seminar, AGC of Michigan has announced a series of lunchtime webinars featuring some of the authors of the recently-updated publication "Contractor's Guide to Michigan Construction Law" (Rev'd 2009).
  

Webinar 1 - January 20, 2010 - 11:30 to 1:00 p.m.

• Bids, Bidders and Bid Protests
  
• The Contract for Construction: Standard Forms and Common Risk Transferring Provisions; 
• Overview of State and Federal Prevailing Wage Law

Webinar 2 - February 10, 2010 - 11:30 to 1:00 p.m.

• Contract Changes / Differing Site Conditions
  
• Defective Plans and Specs
• Delays in Contract Performance
• Concepts in Business Valuation, Potential Financial Statement Impacts and More Accounting, Tax and Financial Issues

Webinar 3 - March 17, 2010 - 11:30 to 1:00 p.m.

• Estate and Business Succession Planning for the Contractor
•  Bankruptcy and the Construction Industry
• Dealing with the Media and Press in Corporate Crisis Situations
  

Click here for more information and to register for one or all of these webinars.

Michigan Bill Would Allow Private Investments in Public Projects

Crain's Detroit Business reports today that legislation has been introduced in the Michigan legislature that would encourage private investors to fund public transportation infrastructure.

House Bill 5461 would create the Private Investment Infrastructure Funding Act, under which municipalities could enter into collaborative relationships with other public entities to develop public facilities and could, among other things, solicit private sector investment for the financing of public facilities through a bid process.  Generally speaking, "public facilities" means transportation-related projects, including public transportation-related infrastructure, as well as other similar public infrastructure improvements.  The term "municipality" would apply to cities, villages, and townships. 

The concept, called private investment infrastructure funding, or PIIF, was first proposed by the Oakland County Business Roundtable and is being discussed as lawmakers, local officials and business look at ways to help with Michigan's transportation-funding straits.

Update:  A December 23, 2009 Editorial in the the Detroit Free Press (here) endorses the idea of private funding for public infrastructure projects.  On January 27, 2010, it was reported (here, and here) that the Michigan Department of Transportation (MDOT) is seeking design, build, finance and operate proposals for the Detroit River International  Crossing (DRIC) project in southwest Detroit.  Click here for a copy of the RFP. 

Further Update (June 2, 2010): H.B. 5461 has gone nowhere since it was introduced, however, legislation to enable the DRIC project, through the creation of Public Private Partnerships (P3) has been moving forward under two other bills, H.B. 4961 and H.B. 6128.   H.B. 4961 was approved by the Michigan House on May 26, 2010. 

AGC of Michigan Sponsor's Construction Law Seminar

On October 30, 2009, AGC of Michigan is hosting a seminar to address a number of pressing legal issues facing contractors today including payment, dispute resolution mechanisms, hiring and firing of employees, and bankruptcy.

This seminar will also launch the 3rd Edition of "A Contractor's Guide to Michigan Construction Law," which has been in the works now for almost a year. Participants will receive a copy of this important legal update.

Click here for more information about this seminar or to register.

E-Verify Regulations Upheld, New Verification Requirements to Begin September 8

A federal lawsuit filed last December, seeking to block implementation of federal regulations requiring verification of employee immigration status (reported here), has ended with a ruling in favor of the Department of Homeland Security.

As reported by FederalTimes.com,

"Judge Alexander Williams of the U.S. District Court for Maryland said in an Aug. 25 ruling that DHS didn’t break the law when it mandated that contractors use the system to check the employment status of their workers.

"The plaintiffs in the case, which include the U.S. Chamber of Commerce, argued that the law authorizing E-Verify prohibited DHS from requiring any group to use E-Verify, a Web-based system employers can use to check personal information such as Social Security numbers to confirm their employees are legally able to work in the U.S.

"The court ruling paves the way for the implementation of the rule, which had been delayed since January because of the case. The rule fulfills a Bush administration executive order mandating that contractors use the system to verify employment status to prevent illegal immigrants from performing government work.

"Starting Sept. 8, new federal contracts worth more than $100,000 will include a clause requiring contractors to use E-Verify to certify the employment eligibility of any current employees who will work under the contract. The rule also requires contractors to use E-Verify to certify the eligibility of all new hires regardless of whether they’ll work on behalf of the government. Existing contracts lasting more than six months can be modified to add the requirement, but only if the contractor agrees"

Court Appeals Rejects Narrow Constrution of "Common Work Area" for Crane Accident

The Michigan Court of Appeals recently reversed the grant of summary disposition to a Defendant finding that there were questions of fact as to whether the area where Plaintiff was injured could be construed as a common work area and whether the risk was posed to a significant number of workers.

In Alderman v J C Development Communities, LLC, 2009 Mich. App. LEXIS ____ (Mich. Ct. App. Aug. 25, 2009), Plaintiff sued Defendant, the general contractor of a subdivision project, when he was injured on the job site. He was employed by a subcontractor engaged to pour concrete basements for the project, which involved over 200 home sites, including 13 sites running along and parallel to electric power lines.

The subcontractor used a 65-foot crane to lift forms from its trucks and set them in place around each home's future basement. The forms would be set one day, concrete would be poured, and the forms would be removed by the crane the next day and replaced on the trucks. The crew would then move to the next site, and other subcontractors would continue with the next steps in the building process.

Plaintiff was part of a crew of 6 men working for the subcontract on Lot 273, one of the sites adjacent to the power lines. As the crane lowered one of the forms onto the foundation, it contacted a power line. A jolt of electric current flowed through the crane and down the chain to the form and the metal "whaler" Plaintiff was using to control the form from the ground. He was knocked unconscious and his hands and feet were severely burned.

The trial court determined the area where the accident occurred was not a common work area, as only workers from plaintiff's crew were exposed to danger from the possibility of the crane touching the overhead wires. The trial court opined, "[a]t most, six employees of one subcontractor were exposed to the risk of electrocution. This is not sufficient to establish a common work area." The Court of Appeals disagreed with this narrow interpretation:

While defendant focuses on the fact that the crane hit the power lines and endangered only plaintiff’s crew and only electrocuted plaintiff, the risk associated with the crane hitting the power line extended far beyond the specific lot where plaintiff was injured. Plaintiff’s crew may have been the only subcontractors working on lot 273 when the accident occurred, but the power lines did not merely run along the one lot. They ran along several lots under active construction, and electricity is commonly understood to be hazardous.

Reversed and remanded.

A copy of the slip opinion can be found here.

Court Upholds City Ordinance Assessing Costs against Owners of Abandoned Homes

The Michigan Court of Appeals recently upheld a challenge to a Battle Creek ordinance imposing a fee against the owners of abandoned residential property.

In Kenefick v City of Battle Creek, __ Mich App __ (2009) (approved for publication July 2, 2009), a city ordinance requiring owners of abandoned homes to pay a "monitoring fee" was challenged on grounds that it was both unconstitutionally vague and violated the Equal Protection Clause. Both arguments failed to persuade the Court of Appeals.

"When these common dictionary definitions are viewed in context of the language of the entire ordinance—the stated purpose of which is to eliminate dangerous and unsightly blight, we conclude that a person of ordinary intelligence would be placed on fair notice of what the ordinance requires or proscribes."

In addressing the Equal Protection Argument, the Court of Appeals applied the rational basis test and concluded the ordinance was constitutional.

"The ordinance’s stated purpose is to overcome the detrimental affects of neighborhood blight and reduce enforcement costs associated with the blight. This Court has held 'protecting and promoting public health, safety, and general welfare are legitimate governmental interests . . . and protecting aesthetic value is included in the concept of the general welfare.' (citation omitted) Thus, the general reduction of blight is undisputedly a legitimate governmental purpose."

A copy of the slip opinion can be found here.

Questions? Contact Peter Cavanaugh or call (248) 543-8320.

Michigan Seller Disclosure Act -- No Claim for Innocent Misrepresentation, Supreme Court Affirms Ruling

On June 17, 2009, Michigan Supreme Court entered an order affirming a 2008 Michigan Court of Appeals decision, which had held that Michigan law did not recognize claims for innocent misrepresentation under the Michigan Seller Disclosure Act (MCL 565.951, et seq).

As we reported in an earlier posting (here), Roberts v Saffell involved a claim that Defendant Sellers failed to disclose a termite infestation in the home they sold to Plaintiff Buyers. Plaintiff's claim was based on Defendant's "No" answer on their Seller Disclosure Statement in response to the question: "History of infestation, if any: (termites, carpenter ants, etc.)"

In affirming the Court of Appeals decision, the Michigan Supreme Court held:

the [Michigan Seller Disclosure Act] provides that a seller is “not liable for any error, inaccuracy, or omission in any information delivered pursuant to this act if the error, inaccuracy, or omission was not within the personal knowledge of the transferor . . . .” MCL 565.955(1). Thus, because a claim for innocent misrepresentation requires that a defendant make a false statement without knowledge of its falsity, the Court of Appeals correctly held that innocent misrepresentation does not constitute a viable cause of action under the SDA. Whether defendants did or did not possess personal knowledge of the infestation is a matter not before this Court as a result of plaintiffs’ abandonment of their fraudulent misrepresentation claim and their exclusive focus on their innocent misrepresentation claim.

Full Cite: Roberts v Saffell, 280 Mich App 397 (2008), aff'd, 483 Mich 1089 (2009).

Bottom line: Always have your own home inspection done before buying a house!

Questions? Contact Peter Cavanaugh or call (248) 543-8320.

Assignment of Contractual Rights without the Consent of the Engineer

By: Gary D. Quesada, Hon. Aff. AIA, J.D.
Principal Attorney, Cavanaugh & Quesada, PLC

When entering a contract, an Engineer cannot accurately assess its risks without being assured that the other party will in fact remain its contracting partner throughout the Project. Therefore, an important risk-management tool for Engineers is to prohibit the assignment of the contract without the Engineer’s written consent.

Management of Risk through Non-Assignment Clause

Most standard form contracts governing an Engineer’s professional services contain a “non-assignment” clause, which purports to prohibit either party from assigning its rights and obligations under the contract, without the written consent of the other. When utilizing the standard forms, scrutiny of the non-assignment clause is rarely deemed necessary, because a commonly held belief is that these “non-assignment” clauses absolutely prohibit assignment without consent, such that any attempted assignment will be void and to no effect, unless the Engineer has expressly granted its consent.

Oliver/Hatcher v. Shain Park

A new Michigan Court of Appeals case has cast significant doubt on whether the non-assignment clauses in the popular standard contract forms will serve to void an assignment, despite lack of consent.

In Oliver/Hatcher Construction v. Shain Park Associates UNPUBLISHED, COA No. 275500, SC No. 136803 (Application DENIED, December 23, 2008), the parties were operating under a AIA A201 General Conditions (1997). The Owner allegedly assigned all its contractual rights without the consent of the Contractor. The Assignee sent notice to the Contractor of alleged latent defects. The Contractor brought an action for declaratory judgment, arguing that the Assignee had no rights against it, because the assignment was without consent and therefore void.

The Trial Court agreed with the Contractor, but the Court of Appeals reversed. The Court of Appeals held that the language of the AIA A201 was consistent with the common law rule that if a party breaches a promise not to assign a contract, the breach gives rise to a cause of action for damages but does not render the assignment itself ineffective.

Heightened Attention to Contract Language for Non-Assignment Clauses

Given the result in Oliver/Hatcher, an Engineer that wishes to secure the identity of its contracting partner throughout the Project should be certain to include language expressly stating that “any attempted assignment by the Owner [or Architect] of its contractual rights or obligations without the written consent of the Engineer is void and of no effect.” Consideration should be given to whether certain rights may be exempted from this prohibition, such as the right to assign to a lender under certain circumstances, or the assignment of contractual proceeds.

The Engineer should expect the inclusion of language “voiding” an attempted assignment will likely be answered with a demand by a contracting partner that the prohibition be reciprocal. Therefore, the pros and cons of the language should be weighed depending on the circumstances.

Survey of Standard Contract Non-Assignment Clauses in Light of Oliver/Hatcher

If the reasoning of Oliver/Hatcher is applied by Michigan Courts in the future, it is doubtful that any of the recent or current versions of the most popular standard contract forms will serve to “void” an assignment made without consent.

1) AIA A201 (Both 1997 and 2007 versions)

General Conditions of the Contract for Construction

The contract in Oliver/Hatcher was the 1997 AIA A201. The language in the non-assignment clause has remained unchanged in the 2007 edition:

Section 13.2 Successors and Assigns

13.2.1 The Owner and Contractor respectively bind themselves, their partners, successors, assigns and legal representatives to covenants, agreements, and obligations contained in the Contract Documents. Except as provided in Subparagraph 13.2.2, neither party to the Contract shall assign the Contract as a whole without written consent of the other. If either party attempts to make such an assignment without such consent, that party shall nevertheless remain legally responsible for all obligations under the contract.

(13.2.2 permits the Owner to assign the contract to an institutional lender providing construction financing for the Project without the Contractor’s consent.)

Comment: The AIA A201 provides for an exception, and also provides for a remedy in the case of assignment without consent. Specifically, if such an assignment is attempted, the original contracting party remains responsible for all obligations under the contract. The Oliver/Hatcher Court interpreted this language not as precluding an assignment but in fact contemplating one, as well as providing for the consequences of assignment.

2) AIA C401-2007

Standard Form of Agreement Between Architect and Consultant

An Engineer may be provided an AIA C401 when performing consulting services to an Architect. The language in AIA C401 does not include the exception, or the remedy contained in the AIA A201:

Section 10.3

The Architect and Consultant, Respectively, bind themselves, their agents, successors, assigns and legal representatives to this Agreement. Neither Architect nor Consultant shall assign this Agreement without the written consent of the other.

Comment: Under the foregoing language, the Engineer’s remedy may be limited to a cause of action for damages arising from the assignment. If the contract does not otherwise provide for it, the Engineer may wish to incorporate the terms from the AIA A201 section 13.2.1, which provides the Architect will remain bound even if an assignment is made (see above).

3) EJCDC 1910-1 (1996) and E-500 (2002)

Standard Form of Agreement Between Owner and

Engineer for Professional Services

The non-assignment language remained the same from the EJCDC 1910-1, 1996 edition to the EJCDC E-500 2002 edition:

Section 6.07 (Section 6.08 in the 1996 edition)

A. OWNER and ENGINEER each is hereby bound and the partners, successors, executors, administrators and legal representatives of OWNER and ENGINEER (and to the extent permitted by paragraph 6.07.B the assigns of OWNER and ENGINEER) are hereby bound to the other party to this Agreement and to the partners, successors, executors, administrators and legal representatives (and said assigns) of such other party, in respect of all covenants, agreements and obligations of this Agreement.

B. Neither OWNER nor ENGINEER may assign, sublet, or transfer any rights under or interest (including, but without limitation, moneys that are due or may become due) in this Agreement without the written consent of the other, except to the extent that any assignment, subletting, or transfer is mandated or restricted by law. Unless specifically stated to the contrary in any written consent to an assignment, no assignment will release or discharge the assignor from any duty or responsibility under this Agreement.

Comment: Similar to the AIA language, the standard EJCDC language appears to contemplate an assignment and provide a remedy, being the continued obligation of the assignor to its contractual duties. Therefore, although the EJCDC forms were not at issue in Oliver/Hatcher, prudence would dictate assuming a court will interpret the EJCDC language similarly to the AIA language.

4) ConsensusDocs 240

Standard Form of Agreement Between Owner and Architect/Engineer

While the ConsensusDocs do not have the history of either the AIA or EJCDC standard forms, a number of owners appear to be embracing these documents. The ConsensusDocs’ non-assignment language is more limited than either the AIA or EJCDC forms:

Section 10.3

ASSIGNMENT. Neither the Owner nor the Architect/Engineer shall assign their interest in this Agreement without the written consent of the other except to the assignment of proceeds

Comment: Applying the reasoning of Oliver/Hatcher to the ConsensusDocs language, it appears ConsensusDocs 240 provides nothing more than a promise not to assign without consent. A court may find that if a party breaches the promise under this clause, the breaching party is only exposed to a claim of damages arising from the assignment. Such damages may be difficult to identify and/or prove. Therefore, the Engineer will want to consider the issues raised in this article. Additional language may be advisable, which either voids any assignment or provides for the continued obligation of the assignor to the Engineer.