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Construction Law Today

Legal Quote of the Week: Lincoln on Settlement

Posted in Alternative Dispute Resolution, Quotes

lincolnDiscourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser — in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough.

— Abraham Lincoln

(And if you asked him today, I’d wager the late President wouldn’t limit the peacemaking’s lawyer’s superior opportunity to just being a good man. )

Legal Quote of the Week: Statutes of Limitation

Posted in Quotes, Statute of Limitations

Justice_Robert_H_JacksonStatutes of limitation find their justification in necessity and convenience rather than logic. They represent expedients, rather than principles. They are practical and pragmatic devices to spare the courts from litigation of stale claims, and the citizen from being put to his defense after memories have faded, witnesses have died or disappeared, and evidence has been lost.

They are by definition arbitrary, and their operation does not discriminate between the just and the unjust claim, or the avoidable and unavoidable delay. They have come into the law not through the judicial process but through legislation. They represent a public policy about the privilege to litigate. Their shelter has never been regarded as what now is called a “fundamental” right.

Robert H. Jackson, Chase Securities Corp. v. Donaldson, 325 U.S. 304, 314 (1945)

Construction Contracts: Top 10 Terms – Changes (Minor Changes)

Posted in Top 10 Construction Contract Terms

Specialty ToolMinor Change Background

Following construction change directives, “minor changes” are the final way to make changes. With the limits on how and when minor changes are allowed, “nominal” change is probably a better name. But they’ve been called minor changes for so long, we’ll continue the tradition here.

Like many of our other construction contract phrases and features, the minor change most likely originates in the AIA contracts. Currently, Section 7.4 of the AIA A201 “general conditions” identify minor changes, and how and when they may happen. Based on that model, other published forms and manuscript contracts usually adopt something similar.

Minor Change Features and Limits

Here’s the principal features and limits you need to know about minor changes to the work:

  • The change must not affect (1) the price of the work or (2) the time to complete it
  • The order mandating the change must be written
  • Usually, only the architect (or comparable design professional) may order a minor change. That’s what you’ll find in in the AIA contract forms. But sometimes parties subvert architectural hegemony and change their contracts to allow the owner to order a minor change under a prime contract, a prime contractor to order one under a subcontract, etc.

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Construction Contracts: Top 10 Terms – Changes (Construction Change Directives)

Posted in Top 10 Construction Contract Terms

keep-calm-and-follow-the-prime-directiveConstruction Change Directive

Next on the list of top ten construction contract terms: “construction change directives.”  Often in their contracts, the owner and the prime contractor agree that the owner may unilaterally order changes in the work and the prime contractor will change the work as the owner orders. Those orders must usually be written. And subcontracts often have similar terms, if for no other reason than to pass down orders that come from higher up the chain.

For generations, the AIA form contracts have referred to those orders as “construction change directives.” And because of that, so does everyone else.

Agree Later

How price and schedule change along with the changed work? That comes later. Ideally, the owner and prime contractor can later agree on price and schedule changes, then incorporate all changes into a comprehensive change order they each sign that supersedes the construction change directive.

If owner and prime contractor don’t agree, they will fall back on other tools. The original contract may have unit prices for particular materials or parts of the work. Then adjusting price is just addition and multiplication. Unfortunately, unit prices aren’t a common feature in contracts for many types of projects.

Cost-plus priced contracts also lend themselves to easy pricing changes. Though if the prime contractor has a fixed fee, the cost of additional or reduced work won’t automatically adjust the fee. Sometimes lump sum contracts will have a default cost-plus feature for additional work. So, if the owner and prime contractor don’t agree on a different way to adjust price, the cost of the additional work, plus a percentage fee, gets added to the lump sum. And while unit prices and cost-plus can set price changes, they still don’t adjust schedules and deadlines. Continue Reading

Waiting for Claim Assignment Doesn’t Toll Statute of Limitations: American Family v. Plunkett

Posted in Assignments, Illinois, Insurance, States, Statute of Limitations

After paying a flood damage claim, an insurance company waits too long to get an assignment of the rights to sue a contractor and architect. Result: the insurance company’s lawsuit gets dismissed and the Illinois Appellate Court affirms. The decision: American Family v. Plunkett (PDF).

Backstory

An owner’s property floods in the summer of 2006. The owner files an insurance claim for the damage. The insurance company denies that claim, prompting the owner to sue the insurance company (Lawsuit 1).

The owner and insurance company settle Lawsuit 1. Because conditions suggest that design and construction defects may have caused the flood, under the settlement agreement the owner promises to assign—to the insurance company—their design and construction defect claims. But that assignment isn’t part of the settlement documents and money exchanged.

Then in 2008 (and still without the owner’s assignment), the insurance company sues the architect and the contractor for defective design and construction (Lawsuit 2). (By paying the owner’s insurance claim under the Lawsuit 1 settlement, the insurance company contends that they now—by subrogation—stand in the owner’s shoes to pursue the defect claims.) The architect and contractor successfully move to dismiss Lawsuit 2. Two courts agree that the insurance company cannot subrogate to the owner’s claims against the architect and contractor—the insurance company must get the owner’s assignment of those claims.

After protracted struggle, the owner finally assigns their design and construction defect claims to the insurance company. The insurance company then files a new lawsuit against the architect and contractor, this time as assignee of—not subrogee to—the owner’s claims (Lawsuit 3).

The architect and contractor recognize that the insurance company filed Lawsuit 3 after the four year limitations period on the design and construction defect claims expired. They move to dismiss (arguing that the claims are time-barred). The trial court agrees, and grants the motion. The insurance company appeals.

Decision on Appeal: No Equitable Tolling

The insurance company argues that Lawsuit 3 isn’t late because equitable tolling applies. Under equitable tolling they argue, running of the limitations period should be suspended while they struggled to get the owner’s assignment of claims against the architect and contract.

The justices hearing the appeal disagree and affirm dismissal. While the justices recognize that equitable tolling can suspend running of a limitations period, the bar is high and the insurance company doesn’t clear it. They explain: it doesn’t happen often and the reasons must be extraordinary. The insurance company’s reason—delay getting claims assigned—just doesn’t qualify.

Looking at this case, the justices reproach the insurance company for not getting the owner’s assignment earlier, when settling Lawsuit 1, instead of merely getting the owner’s promise to assign later. The justices remark that delay in filing Lawsuit 3—imposed by the struggle for assignment—is a problem of insurance company’s own making. And problems you made yourself don’t support suspending a limitations period.

Observations, Questions & Lessons

  • Often referred to as “recovery,” as part of a settlement insurance companies traditionally require their policy holders to assign policy holder claims against third-parties. (Your insurance company pays you cash on an insurance claim for flood damage. In exchange, you assign to the insurance company your claims against those allegedly responsible for causing the flood.) It’s a customary step in the choreography of insurance claim settlement. But it didn’t happen here. This raises—and leaves lingering—the question: why? What was different about this insurance claim and this settlement that garnered different—and for recovery, ultimately fatal—treatment?
  • And this decision suggests: get the deliverables when paying the money. Sometimes that’s impractical, but that’s rare. An assignment today’s usually better than a promise to assign on Tuesday. And because the insurance company found out the hard way in this case, now you don’t have to.

Construction Mortgage Foreclosure Does Not Wipe Out Reciprocal Easement Agreement Rights: Bank of America v. Cannonball

Posted in Construction Finance and Insolvency, Illinois, Mechanics Liens, States, Uncategorized

A foreclosing construction lender recently tried to wipe out liens securing debt under a shopping center cross-use and easement agreement. The Illinois Appellate Court denied that attempt. The decision: Bank of America v. Cannonball LLC.

Backstory

It starts with a new shopping center with a Home Depot, a Kohl’s, and a Target. The local village subsidizes part of the developer’s construction cost. To fund that subsidy, the village sells bonds to investors. And to raise money to service the debt owed under those bonds, the village imposes a special service area tax on the businesses that sell goods and services in the shopping center. (The tax obliges those businesses to collect a surcharge on each sale to pay the tax).

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No Mechanics Lien For Pre-Purchase Due Diligence Consultants

Posted in Claims, Environmental, Illinois, Mechanics Liens, States

synthetic fuel engineerFees for property purchase feasibility consulting are not secured by a mechanics lien. That’s what a panel of Illinois Appellate Court Justices held in Mostardi-Platt Associates v. Czerniejewski.

Backstory

Power Holdings of Illinois wants to build a new synthetic fuel plant that processes coal into gas. They need land for the proposed plant. So, as principal they hire ADA Resources as an agent to scout locations. The agent’s role includes analyzing whether a particular piece of land will suit Power Holdings’ proposed plant. And so the agent hires Mostardi-Platt Associates to consult on feasibility, particularly, feasibility of of regulatory approvals.

In their search for suitable land, the agent comes across the Czerniejewski farm. The Czerniejewskis grant the agent—and so Power Holdings as principal too—an option to buy their farm. Afterwards—as part of deciding whether to exercise the option and buy the farm—the agent has the consultant study the feasibility of getting regulatory approvals for a plant on the Czerniejewskis’ farm. Continue Reading

No Setoff for FDIC Contract Repudiation Damages Under Placida v. FDIC

Posted in Attorneys Fees and Costs, FDIC & Bank Failures, Florida, States, Uncategorized

Bank With a Closed Sign PostedWhen a bank fails and the FDIC repudiates a construction loan—ending further “draws” or disbursements—the borrowers can’t setoff damages they suffer because of repudiation to reduce the amount of debt they owe under the loan. That’s what a panel of judges from the US Court of Appeals for the 11th Circuit decided in Placida v. FDIC.

Placida v. FDIC Backstory

This case starts with a construction loan from Freedom Bank to borrower, project owner, and developer Placida Professional Center, LLC. The loan documents comprise a promissory note, a construction loan agreement, a mortgage against the project, and personal guarantees from two of the borrower’s principals.

Freedom Bank fails while construction is still underway, and while one of the borrower’s monthly draw requests is still pending. Then—about a week after appointment as Freedom Bank’s receiver—the FDIC repudiates the construction loan under 12 USC § 1821(e). The result: as Freedom Bank’s successor, the receiver will not fund any more draws, including the one that was pending on the Appointment Date. With the flow of monthly construction loan disbursements cut off, the project soon grinds to a halt as unpaid builders and suppliers stop providing work and material and start recording mechanics lien claims against the project.

The borrower files administrative claims with the receiver for:

  • Damages caused by loan repudiation, and
  • A declaratory judgment, declaring that the note, the mortgage, and each guarantee is “of no further force or effect”

The receiver denies the borrower’s administrative claims and sends the borrower a notice of denial. That notice explains how the borrower may seek judicial review of the claim denial: file a lawsuit in federal court. And the notice also identifies the borrower’s deadline for filing that lawsuit.

The borrower files that lawsuit in the Middle District of Florida. About three months later, the receiver sells the loan to a joint venture limited liability company composed—60/40—of the FDIC and a private investor. Then the case goes to trial before Judge James S. Moody, Jr. Continue Reading

Construction Contract Requires Written Invoice Before Owner Must Pay Contractor: Kasinecz v. Duffy

Posted in Completion, Illinois, Mechanics Liens, States, Uncategorized

Chute removing demolition debris from high window out to dumpsterA panel of Illinois Appellate Court justices recently reminded contractors: if you want to get paid, comply with your contract. That reminder—along with some other interesting things to remember—comes in this decision: Kasinecz v. Duffy (PDF).

Kasinecz v. Duffy Backstory

Kasinecz v. Duffy starts as an owner and prime contractor contract to renovate a building. Their contract says that interim—monthly—payments are due from owner to contractor “upon invoicing.”

As often happens, as the renovation work progresses, things start to go badly, fostering suspicion, polarizing owner from contractor, and vice-versa. A principal polarizing force: the owner’s response to contractor payment requests—the owner stops paying. The owner contends that the contractor hasn’t submitted invoices as the contract requires, and so the owner isn’t obliged to to pay. Payments stop. The contractor gathers-up tools, equipment, and material, then abandons the work still in progress.

Contractor Claims

Departed and still unpaid, the Contractor sues the owner:

  • For breaching their contract

  • For quantum meruit (a contract substitute imposed by judicial equity)

  • To foreclose a mechanics lien securing the debts represented by the the breach of contract and quantum meruit claims

At a bench trial, Judge Bonnie Wheaton hears evidence and decides for the owner. She finds the contractor breached the contract first, by insisting on payment but not submitting the contractually mandated invoices. The contractor appeals. Continue Reading