Gordon & Rees Ranks #5 in Top 50 Construction Law Firms in the Nation

Gordon Rees Scully Mansukhani has been ranked the #5 construction law firm in the nation by Construction Executive in the magazine’s 2020 ranking of The Top 50 Construction Law Firms. Gordon & Rees is the only California-based law firm to rank in the Top 25.

The firm was ranked in the Top 10 in more specific areas as well.

  • #1 in the Top 10 Law Firms Ranked by Most Locations
  • #2 in the Top 10 Law Firms Ranked by Number of Construction Attorneys
  • #6 in the Top 10 Law Firms Ranked by Number of States Admitted to Practice

“With offices throughout the nation and outstanding construction attorneys in many of those offices, we are able to offer our construction clients a diverse range of legal services wherever they do business,” said Ernie Isola partner and co-chair of the firm’s construction practice group.

“As counselors to the construction industry it is critical that we understand the business of our clients. Our advice helps our clients maintain a competitive edge,” said Allen Estes partner and co-chair of the construction practice group.

Construction Executive surveyed hundreds of the country’s law firms with a construction practice to collect data from activity in 2019, rankings were ultimately determined by an algorithm that weighed multiple factors. The rankings feature analysis accompanied by in-depth articles detailing the impact of the COVID-19 pandemic and the construction industry’s rise to the occasion in the unprecedented circumstances of early 2020.

Gordon & Rees is regularly recognized for its top tier construction practice throughout the United States. The group consists of more than 150 lawyers nationwide who focus their practice on the comprehensive range of legal services required by all participants in the construction industry — architects, engineers, design professionals, design joint ventures, owners, developers, property managers, general contractors, subcontractors, material suppliers, product manufacturers, lenders, investors, state agencies, municipalities, and other affiliated consultants and service providers. As the only law firm with offices and attorneys in all 50 states, we deliver maximum value to our clients by combining the resources of a full-service national firm with the local knowledge of a regional firm.

This is Construction Executive’s second annual ranking, please click here to learn more.

Transit Oriented Development Bringing Solutions in the Peninsula

The former Bay Meadows racetrack underwent a massive face lift when it was converted into a residential community with new homes, parks and office buildings. Initial construction began in 2013, and the approved plan calls for 1,100 housing units, 820,00 square feet of commercial space and 18 acres of parks, conveniently located next to a Caltrain stop midway between San Francisco and Mountain View. The old racetrack site is about to enter phase two and its past success shows how transit oriented development can be a win for both developers and communities.

The Texas Construction Fund Act

Texas law on mechanic’s liens is not favorable to subcontractors, particularly those from out of state. Perfection of a mechanic’s lien requires subcontractors to provide repeated monthly notice to prime contractors and owners on an accelerated timetable, with notice deadlines often coming (and going) before payment issues become apparent. For example, first-tier contractors (that is, subcontractors who contracted with the prime), must send a letter by certified mail, return receipt requested, to the owner and the original contractor informing them of the unpaid claim not later than the 15th day of third calendar month following each month in which labor was performed or material delivered. Tex. Prop. Code § 53.056(b) (the so-called “Third Month Notice”). Failure to send a Third Month Notice (or multiple Notices, as the case may be), will result in lien non-perfection, even if the terms of the subcontract do not require payment at that point (if, for example, the subcontractor begins work on a six-month project in January and is not due to be paid until after the work is completed in June of the same year).

Further, to properly “trap” unpaid project funds in the hands of the owner (such that they are available to satisfy a mechanic’s lien), the Notice must contain specific statutory language set out in Section 53.056(d). Failure to send a timely Notice (or Notices), or to include the required statutory language, will result in no funds being “trapped” in the hands of the owner. And an owner’s liability on a mechanic’s lien is limited to funds properly “trapped.”

We frequently encounter situations where a subcontractor (particularly an out-of-state subcontractor) fails to comply with these strict requirements and is left without recourse against the owner. The only way to ensure valid perfection is to send multiple Third Month Notices, even if no payment obligations have arisen under the terms of the subcontract. For business-relation reasons, many subcontractors are reluctant to take this step.

Fortunately, the Texas legislature has balanced the scales somewhat with the Texas Construction Fund Act (the “Act”). The Act applies to those furnishing labor or materials for the construction or repair of a house, building, or improvement on real property, and provides that any funds paid to a contractor, subcontractor, or supplier made in payment of labor or materials are held in trust for all parties in the construction chain. Tex. Prop. Code §§ 162.002 and 162.003. The Act acknowledges a basic reality of modern construction projects: that prime contracts generally deposit project monies into a few common accounts, and it allows subcontractors and suppliers to recover from these funds without first pleading entitlement to these funds. See Holladay v. CW&A, Inc., 60 S.W.3d 243, 246 (Tex. App.—Corpus Christi 2001, pet. denied).

The Act accomplishes this goal in four ways. First, it treats “construction payments”—defined as payments made to a contractor or subcontractor, or an officer, director, or agent of a contractor or subcontractor, under a construction contract for the improvement of specific real property in Texas—as trust funds. Tex. Prop. Code § 162.001.

Second, the Act treats certain recipients of construction payments as trustees. The universe of potential trustees is broad, and includes contractors, subcontractors, or owners, or officers, directors, or agents of a contractor, subcontractor, or owner who receives trust funds or who has control or direction of trust funds. Tex. Prop. Code § 162.002.

Third, it provides an expansive definition of beneficiaries, which includes any artisans, laborers, mechanics, contractors, subcontractors, or materialmen who labors or who furnishes labor or material for the construction or repair or an improvement on specific real property in Texas. Tex. Prop. Code § 162.003(a).

Fourth—and most importantly—the Act allows for civil and criminal liability for any trustee who intentionally, knowingly, or with intent to defraud “directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries of the trust funds. Tex. Prop. Code § 162.031(a).

It is not difficult to imagine circumstances constituting misapplication. For example, a prime contractor who uses progress payments from an owner for Job A to pay subcontractors and vendors on Jobs B and C has misapplied those progress payments, even if the payments on Jobs B and C were not made with an express intent to defraud. Under such circumstances, an unpaid subcontractor on Job A can bring a civil claim not just against the contractor, but also its owners, officers, directors, and agents of the contractor (as well as anyone else at the contractor who had control or direction of the payment of the construction fund), and expose these individuals to personal liability.

Obviously, a claim under the Trust Fund Act is not a silver bullet. Recovery depends on the ability to prove misapplication, there are certain affirmative defenses available to the defendants, and the some or all of the defendants may be judgment proof. In this sense, it is not equivalent to a properly perfected mechanic’s lien, which allows the subcontractor to recover “trapped” project funds though a simple foreclosure process.

That said, a Fund Act claim is a powerful tool, as it exposes individual defendants to personal liability, and the threat of such a claim can be a very powerful motivation to encourage contractors to resolve unpaid subcontract amounts.

Colorado Adopts Notice Rule for Typical Design Professional Claims-Made Insurance Policies

Typically, design professionals’ errors and omissions insurance policies are claims-made and reported or claims-made policies. These policies, unlike traditional occurrence policies, provide coverage for claims made and reported during a predetermined period of time. With a claims-made policy, the making of a claim is the condition precedent to coverage under the policy. Claims-made policies provide more certainty to the insurer which translates into lower premiums for the insured.

Recently, the Colorado Supreme Court addressed a question of first impression regarding untimely notice under claims-made policies in Craft v. Phila. Indem. Ins. Co., 343 P.3d 951, 955 (Colo. 2015). Although Craft did not involve design professionals or their insurance policies, the holding is broad enough that it will be applied to design professionals and their insurance policies. The Court concluded the notice rule applies to untimely notice under claims-made policies. Following this ruling, insurers are not required to prove they were prejudiced by untimely notice of claim. Instead, an insurer can deny coverage if a claim is made or reported one day outside the policy period.

Practically, timely reporting of claims and potential claims is important regardless of the type of policy involved. Following Craft, it is even more important that design professionals timely report claims and potential claims. If a claim is not timely reported there is a risk it could fall outside the policy period resulting in loss of coverage that otherwise would have existed if the claim was timely reported.

The Court of Appeals Clarifies the Purpose of Public Contract Code § 7107 & the Ramifications for Public Entities Violating the Same

On April 1, 2015, in East West Bank v. Rio School District, the Second Appellate District of the California Court of Appeals held that whereas under Public Contract Code § 7107, a public entity can withhold funds owed to a contractor when there are liens on the property or when there is a good faith dispute concerning whether the work was properly performed, the public entity cannot withhold funds due to a contractor over a dispute over the contract price. In reaching its holding, the court noted its disagreement with Martin Brothers Construction, Inc. v. Thompson Pacific which held otherwise. The Court also held that the doctrine of “unclean hands” does not apply to Public Contract Code § 7107, to limit a contractor’s potential recovery of damages and attorney’s fees. Finally, the Court held that the time limitations for a contractor to submit a claim under a public works contract do not apply where that contractor’s claims arise out of the public entity’s alleged breach of that contract.

Background Facts

In East West Bank, the Rio School District (District) entered into a contract with FTR International, Inc. (FTR) to build a school. During construction, FTR submitted approximately 150 proposed change orders (PCOs), asserting that they were necessary due to the District providing plans that were inadequate and misleading. The District, however, denied most of the PCOs on the grounds that the work was covered under the base contract, that the amounts sought by FTR were excessive, and/or on the grounds that a given PCO was untimely in accordance with the public works contract notice provisions. The project was ultimately completed in June 2001 and the District filed a notice of completion on August 7, 2001.

Thereafter, a dispute between FTR and the District arose out of a payment issue. Under the contract, the District retained 10% of each progress payment, such that at the completion of all work, the District held a reserve of $676,436.49. The reserve was subject to stop notices filed by FTR’s subcontractors until the last stop notice was released on September 28, 2004. When the District failed to pay the balance due under the contract, refused to release any of the retention, and refused to compensate FTR for delay and disruption damages, FTR filed suit. FTR asserted a claim against the District for breach of contract and violation of Public Contract Code § 7107, seeking damages, statutory penalties, attorney’s fees, interest and costs. The District countered with a separate lawsuit, which was subsequently consolidated. After the trial court found in FTR’s favor, the District appealed, raising three primary issues regarding when a public entity can withhold retention payments under Public Contract Code § 7107, whether a contractor must comply with time limitations for filing a claim under a public works contract following a breach, and whether a public entity can assert an “unclean hands” defense to dispose of a claim for damage and attorney’s fees following a statutory violation.

Explanation of the Court’s Decision

In reaching its decision, the Second Appellate District noted that Public Contract Code § 7107(c) calls for a public entity to release any retention previously withheld within 60 days after completion of a work of improvement. In the event of a dispute, the public entity can withhold from the final payment an amount not to exceed 150% of the disputed amount. Under subsection (f), however, a public entity will be subject to a penalty of 2% per month, in lieu of interest, on any contract amount improperly withheld, plus attorney fees and costs. At trial, the District argued that it was justified in withholding the retention amount – more than 10 years after completion of the project – due a good faith dispute with FTR over whether a majority of the 150 PCOs were wrongfully denied, which the District claimed, impacted how much money, if any, it owed FTR. The Court, however, found that argument unavailing. It noted that the purpose of retention is to provide security against potential mechanics liens and to insure that the contractor will complete its scope of work properly and repair any defects. The Court added that once the public entity no longer needs that security, the retention funds must be paid. Since the dispute with FTR for additional monies did not require the District to retain funds as security, the District’s failure to pay is exactly the type of behavior that Public Contract Code § 7107 was enacted to deter. Thus, the Court found that the District was subject to the statutory penalty.

Next, the Second Appellate District in East West Bank addressed the issue of whether a contractor can recover damages on claims that are not submitted within the time limits set forth under a public works contract. On this issue, the Court found that some of FTR’s claims arose from the District’s breach of the contract, in not providing adequate plans and specifications. As a result, the Court – relying on a seldom-used 1959 decision in D.A. Parrish & Sons v. County Sanitation Dist., etc. — held that the time limitations in a public contract do not apply to claims arising from the public entity’s alleged breach of that contract.

The Second Appellate District in East West Bank concluded with a discussion regarding whether a public entity can assert an “unclean hands” defense to FTR’s claim for damages, penalties and attorney’s fees under Public Contract Code § 7107. Reviewing the purpose behind the code section, the Court noted that when the California Legislature enacts a statute forbidding certain conduct for the purpose of protecting one class of persons from the activities of another, a member of the protected class can maintain an action for a violation of that statute, notwithstanding the fact that the plaintiff shared in the illegal transaction. The Court added that the protective purpose of the legislation is only realized by allowing the plaintiff to maintain an action against the defendant within the class that is to be deterred.

In this instance, Public Contract Code § 7107 was intended to protect one class of persons (public works contractors) from the activities of public entities. As a result, the doctrine of “unclean hands” does not apply a matter of law, and FTR (as a member of the protected class) can recover attorney’s fees, in addition to all other damages available as a result of the District’s violation of the statute.

Takeaways

All told, the East West Bank case is good news for contractors on public works contracts. A public entity cannot withhold retention from contactors on projects involving a payment or contract dispute, in the absence of a mechanics lien, a stop notice, or a claim of defective work. Particularly where a payment dispute can take years to resolve through litigation, this case is a reminder that public entities cannot hold onto retention amounts as a means of placing economic pressure on the complaining contractor. Where the public entity engages in that behavior, it will may be liable to the contractor for damages, attorney’s fees and penalties under Public Contract Code § 7107. Moreover, the public entity will not be able to assert an “unclean hands” defense to reduce or eliminate an award in the contractor’s favor.

The East West Bank decision, however, also highlights a split of authority between the California Courts of Appeal regarding whether a contractor will have waived a claim for damages and extra compensation under the (typically) harsh notice provisions in public works contracts. In this instance the Court held that District’s breach of the contract disposed of the notice requirements, but in many instances, courts have would have foreclosed any recovery for FTR’s claims for extra compensation. Thus it is very important for contractors on public works projects to comply with the notice provisions – despite this recent decision — or else risk forfeiture.

For more information on the East West Bank case, navigating the potential perils of public works contracts and other developments in Construction Law, please feel free to contact the attorneys at Gordon & Rees LLP.

To See or Not to See: The Law of Patent vs. Latent Defects

In Delon Hampton & Associates, Chartered v. The Superior Court of Los Angeles; Los Angeles County Metropolitan Transportation Authority, the Second District for the Court of Appeals of California set forth a concise listing of exemplar cases of patent defects. In this case, a design professional successfully challenged a construction defect lawsuit brought against them, on the basis that the defect complained of was open and obvious and the County had ran out of time to bring their action.

In Delon Hampton & Associates, a lawsuit was brought by Jose Madrigal, (Madrigal) a real person who sued the Los Angeles County Metropolitan Transportation Authority (MTA) after falling on a stair at a rail station constructed on 4th and Hill Streets in Los Angeles.  The rail station was completed in 1993 and Madrigal filed his suit on August 9, 2012, alleging among other things, that the banister of the stairwell was “too low” and the stairwell was “too small” given the number, age and volume of persons entering and exiting the Metro Rail station.  Further, Madrigal alleged that MTA failed to properly design, construct and inspect and repair the premises.  MTA cross-complained against numerous other entities involved in the construction of the rail station where Madrigal suffered his injury including Hampton, which performed “design and/or construction services at the premises”.  Hampton, challenged the lawsuit by way of a demurrer, or a response stating that the lawsuit did not have merit.  Hampton alleged that MTA’s claims were barred by the four year statute of limitations set forth for patent defects in California Civil Code Section 337.1.

Patent defects which are sometimes referred to as defects that are “open and obvious” are defects defined as “apparent to a normally observant person”.

In this case, the Court cited the following as an example of things that are patent defects;

  • the absence of a fence around a swimming pool;
  • raised paving stones on a patio area;
  • water pooling on a landing;
  • defects related to stairs and guardrails, spacing between guardrails; and
  • the absence of marking stripes;

Here, the court found that banister being “too low” or “too narrow” was also open and obvious.  Thus, the defects were considered to be patent and the four year statute was seen to apply.  Given, the timing of this suit close to the ten year statute of limitations, the court’s holding serves as a good reminder for attorneys and their clients to perform a preliminary analysis of the nature of the defects alleged in claims.

Specifically, as lawsuits are filed close to the ten year statute of repose, one area to explore in a single issue case is if you can eliminate a cause of action based on patent defects.  Moreover, in multi-issue cases for several construction defects, parties should always be aware of analyzing whether issues can be identified as patent and perhaps used as a tool in negotiations, settlement discussions or pre-trial motions.

 

Delon Hampton & Associates, Chartered v. The Superior Court of Los Angeles; Los Angeles County Metropolitan Transportation Authority, 227 Cal. App. 4th 250 (2014).

Kiewit-Turner Walks Away From VA Hospital Project

On Dec. 9, 2014, the United States Civilian Board of Contract Appeals (the Board) issued a decision in Kiewit-Turner v. Department of Veterans Affairs, holding that Kietwit-Turner (KT) was entitled to stop construction on a multimillion-dollar project because the Department of Veterans Affairs (VA) materially breached its agreement to produce a design within its estimated budget.

The Board found that a subsequent contract modification obligated the VA to provide a re-design that could be built for the estimated construction cost at award (ECCA) of $582,840,000.

The Board also determined that the VA materially breached its contract with KT by failing to produce a design that could be built for the ECCA.  Specifically, KT was deprived of the benefit of working with a design which would allow construction within the ECCA.  KT could not be compensated for this deprivation because the VA did not have adequate funds to pay for the project as designed.  Although the VA would suffer some forfeiture, the Board found that the potential forfeiture was limited because the agency retained possession of the land and buildings.  There was also little likelihood that the VA would cure its failure as its representatives stated that it would not re-design the project or seek additional funds.  Finally, the Board found that the VA’s behavior did not comport with standards of good faith and fair dealing.

In light of the material breach, the Board held that KT was entitled to stop work on the project.  The Board acknowledged that KT proceeded with construction during the dispute.  However, it held that KT maintained the right to stop work because it performed all activities under “strenuous protest.”

Following this decision KT took the position that it intends to walk away from the project and seek reimbursement of the construction costs it fronted, which are estimated at $1 million. Colorado lawmakers have expressed their desire for the VA and KT to restart negotiations in an attempt to find a pathway forward for completion of the project.  Whether KT returns to the project or not, the VA’s apparent unwillingness to salvage the contract with KT before litigation commenced by either pursuing a redesign or additional funding for the project will only further increase construction costs for a project already plagued by budgeting issues.

Cranes, Cranes Everywhere – Tips to Select Qualified Contractors

As far as the eye can see, the Denver skyline is lined with construction overhead cranes.  This evidences a resurgence of the construction industry throughout Colorado.  But, the recent, rapid rebound of construction (commercial and residential) has caused a shortage of qualified contractors and subcontractors.  And, the qualified contractors and subcontractors are being selective in bidding on and selecting projects.  Inevitably, this has led to less qualified or unqualified contractors and subcontractors returning to the Colorado construction market.  This poses additional challenges in the selection of contractors as the lowest price may not provide the best value when delays, cost overruns or defects are included.

A panel of industry experts including Sean Downey, CIF, Carole Pollard, RIAI, David Corrigan, ACEI and CIBSE and Dr Kevin Kelly, DIT and CIBSE made up the representative team with the audience encouraged to become the fifth panel member by David Doherty, Chairman CIBSE Ireland in his opening address. The event facilitator was entrepreneur and Dragons Den panellist Sean Gallagher. Because of his experience in, and knowledge of, the sector, he also played an active role in the debate. They even talked about what is necessary for future construction. The importance of having the right construction equipment is obvious, everyone knows how tools like Industrial Washers and shims are a must when it comes down to construction. Without them, you won’t be able to finish any projects. Besides that, we have to make sure the equipment is in perfect working condition, especially the crane operator since they are such an important part of moving heavy objects. This is why a crane inspection service is needed every time. The first steps will be a massive infrastructure upgrade, but that is only the beginning. We want to bring more power to homes where power’s often either too expensive or hard to get access to

CONBlog_cranesWhile there’s no certain way to avoid hiring an unqualified contractor, considering factors such as prior performance, reputation, length of time in the industry, insurance and Better Business Bureau rating can help.  Contractors who successfully completed prior projects will strive to continue their past track record on future projects.  Similarly, contractors who are notoriously late or perform shoddy work will have a poor reputation with their competition who will be called on to correct their mistakes.  While new contractors are not per se unqualified, they may be fleeing another jurisdiction to escape claims or a bad reputation.  Many fly-by-the-seat-of-their-pants contractors could not survive the recession because of their poor quality work. With the resurgence, these contractors have re-entered the industry.  While lack of experience shouldn’t automatically disqualify a contractor, it does warrant further investigation.  Investigating a contractor’s record with its insurance carrier can also be informative.  If the contractor carries the minimum insurance or changes carriers frequently, it could indicate prior problems resulting in claims.  Finally, reviewing a contractor’s Better Business Bureau rating can uncover consumer complaints regarding prior projects.

There’s no guaranteed method to ensure a contractor is qualified.  But, considering factors beyond price will increase the likelihood of selecting a qualified contractor.  Spending a little extra time (and money) to select a qualified contractor in the beginning can avoid costly delays, overruns and defects during the project.

Image courtesy of Flickr by Phil Roeder

New AAA Supplementary Rules for Fixed Time and Cost Construction Arbitration

Recently, the American Arbitration Association (AAA) issued a new set of Supplementary Rules for Fixed Time and Cost Construction Arbitration in response to concerns by counsel and litigants wanting more predictability when estimating and anticipating the maximum amount of fees, costs and time needed to complete construction arbitration proceedings.  It is important to note that since AAA still offers parties the option to adjudicate cases under the Construction Industry Arbitration Rules and Mediation Procedures, the new Supplementary Rules are more useful for cases involving discrete issues where the parties will benefit from a proceeding involving limited discovery and document exchanges.

Effective immediately, where parties to a contract agree to resolve their disputes under the new Supplementary Rules, AAA has the exclusive right to administer any arbitration proceeding, by and through the members of the AAA’s Roster of Construction Neutrals.

Once parties decide to initiate arbitration proceedings under the new Supplementary Rules, there are several key features designed to yield a more time- and cost-effective proceeding.  For instance, the new Supplementary Rules (except in two instances) shall apply only to arbitrations involving two parties.  In addition, each party is required to provide the arbitrator with the contact information (including address, telephone number, and email address) of a “designed employee,” or client representative, who will be copied on all correspondence in the case, to ensure real-time updates on the progress of the arbitration proceeding.

Prior to the actual hearing, the new Supplementary Rules call for the parties to develop a discovery plan, for the arbitrator’s review and approval, which adheres to the tenets of minimizing cost and time.  One other key feature of the new Supplementary Rules is that once the parties take part in the arbitration hearing and finish presenting evidence, the arbitrator is required to issue an award no more than 20 days from the close of the hearings, in writing and in the manner required by law, that is no longer than three pages.

The features and procedures outlined in the new Supplementary Rules can result in significant cost-savings over arbitrations conducted under the traditional AAA construction industry rules.  As set forth in the series of fee schedules under the new Supplementary Rules, for cases that do not require site visits, pre-hearing conferences or consideration of post-hearing briefings, the maximum fees can range between $10,500 and $52,000, exclusive of travel expenses.  As such, contractors and design professionals might want to discuss with their clients whether they want to include or amend the dispute resolution provisions of their contracts, so that certain disputes are resolved under these new, time- and cost-effective Supplementary Rules offered by AAA.

Gordon & Rees’s latest Construction Law Update

Check out Gordon & Rees’s latest Construction Law Update, our quarterly take on trends of interest to design professionals, contractors, and developers throughout the country.

In the most recent edition, members of the firm’s Construction Practice Group discuss commercial design professionals’ liability for faulty plans and inspections; whether insurance brokers owe a duty to procure coverage needed for a project; new developments related to SB 800; construction managers, licenses and disgorgement; and bonded stop notices as a tool to secure payment.

For even more essential analysis on the impact of legal changes in the industry, go to http://www.gordonrees.com/practices/construction.