Ninth Circuit Rules Supreme Court’s Two-Part Test of Implied Certification under the False Claims Act Mandatory

For those contractors in the government arena, read on.

The False Claims Act (“FCA”) was enacted to deter knowingly fraudulent actions by contractors which resulted in a loss of property to the Government. Intent to defraud with resulting financial hardship was required. Contrary to popular misconception, the statute was not designed to punish all false submissions to the Government simply because those submissions, or claims, are later found to be false. The statute’s inclusion of the requisite element of knowledge is consistent with this notion:

(1) A defendant must submit a claim for payment to the Government;

(2) the claim must be false or fraudulent;

(3) the defendant must have known the claim was fraudulent when it was submitted (also known as scienter); and

(4) the claim must have caused the Government to pay out money.

See 31 U.S.C. § 3729(a).

Despite these explicit elements (in addition to common law elements of fraud), over the last two decades, contractors have seen ever-expanding theories of FCA recovery presented by qui tam plaintiffs and the Government. For example, under the FCA, the false “claim” evolved over time: the claim no longer needs to be an express false claim (i.e. the truthfulness of the claim is a direct condition of payment); the claim can be “implied” misrepresentation or “half-truth”.

The United States Supreme Court in its paramount 2016 Escobar decision dealt squarely with the issue and interpretation of “implied” false certifications. The High Court, in pertinent part, ruled that implied certification is a viable theory of FCA liability at least where two conditions are met: (1) first, the claim does not merely request payment, but also makes specific representations about the goods or services provided, and (2) second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations “misleading half-truths.” Escobar went on to provide an exact test for the FCA’s materiality requirement, clarifying that, even when a provision is labeled an express “condition of payment”, not every violation of that requirement will give rise to liability. Instead, materiality looks to the effect on the likely or actual recipient of the alleged misrepresentation; i.e. the Government. Put another way, the Government’s designation of compliance with a particular statutory, regulatory, or contractual requirement is not dispositive on the issue of materiality.

On August 27, 2018, the U.S. Court of Appeals for the Ninth Circuit, in U.S. ex rel. Scott Rose, et al., v. Stephens Institute, No. 17-15111 (9th Cir. August 24, 2018), affirmed both express and implied certification theories under the FCA, finding that falsity can be had by (1) an express certification; i.e. where the contractor seeking payment falsely certifies compliance with a law, rule, or regulation as part of the process for which its claim for payment is made/submitted, or (2) an implied false certification; i.e. the contractor has previously undertaken to expressly comply with a law, rule, or regulation (but does not do so as to the instant claim), and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required as part of the process in submitting the claim in question.

With respect to the later, the Ninth Circuit mandated Escobar’s two-part test for implied certification, but only where the two conditions enumerated in Escobar are satisfied: again, (1) the claim makes specific representations about the goods or services provided, and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations “misleading half-truths.”1

The take away: the Ninth Circuit’s latest opinion is generally helpful for some defendant contractors: in cases where the now-mandatory two-part test is not met, absent appeal, the defendant may be absolved of FCA liability. That being said, government contractors and others participating in federally-funded programs must be prepared to defend against FCA suits based on an implied certification theory, which still very must exists.

The opinion in U.S. ex rel. Scott Rose, et al. v. Stephens Institute was issued by a three-judge panel. The Ninth Circuit left open the possibility that the issue may be revisited en banc.
_______________________________________________________________________

1 Although beyond the scope of this article, “misleading half-truths” are often found when the withholding of certain data by the defendant from the Government caused, or was material to, the Government’s decision to purchase the goods or services; i.e. the data was a condition of payment even if not designated an express condition of payment. For example, when the defendants had knowledge that the degradation of bullet-proof vests which they sold to the Government contradicted the defendants’ misrepresentations about the superiority of those vests. Note, the inquiry is highly factual and must be analyzed on a case-by-case basis.

Using the Prevention Doctrine

The following scenario happens regularly in the construction industry. A contractor on a project reaches out to a subcontractor to perform work. Excited about the prospect of performing the work, the subcontractor signs a contract and puts it nose to the grindstone. After dutifully completing the work the subcontractor turns to the contractor and asks to be paid. But, the contractor refuses saying that there is a provision in the subcontract that says the contractor is only obligated to pay the subcontractor if the contractor receives payment from the owner. So the contractor has completed the work, but has no money to show for it.

One potential remedy for a subcontractor in this situation is the use of the prevention doctrine. “Under the prevention doctrine, ‘if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused.’” Cox v. SNAP, Inc., 859 F.3d 304, 308 (4th Cir. 2017) (quoting Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 7171, 725 (4th Cir. 2000)). “Put simply, ‘where a party to a contract is the cause of the failure of the performance of the obligation due him or her, that party cannot in any way take advantage of that failure.’” Haddon Hous Assocs v. United States, 711 F.3d 1330, 1338 (Fed. Cir. 2013) (quoting Restatement (Second) of Contracts § 245; Williston, § 39:4).

So let’s add to the scenario above that the contractor failed to request payment from the owner for the subcontractor’s work. The contractor’s failure to request payment could be deemed a violation of the prevention doctrine, which would bar the contractor from being able to raising the contract terms as a defense. Alternatively, let’s say that the contractor had committed significant errors on the project and that as a result, the owner was withholding funds. Here too, the subcontractor could contend that the contractor’s mistakes on the project, which led to the owner withholding payment, should excuse contract terms that would otherwise bar payment. Basically, the contractor should not be allowed to benefit from its mistakes and failures to not pay an innocent party.

While the prevention doctrine is not a sure-fire solution to a problem with a contractor who won’t pay, it is a useful tool that we should be ready to use when the situation warrants.

Illinois Supreme Court Limits Reach of Implied Warranty Claims Against Contractors

In a recent decision, the Illinois Supreme Court held that a purchaser of a newly constructed home could not assert a claim for breach of the implied warranty of habitability against a subcontractor where the subcontractor had no contractual relationship with the purchaser. Sienna Court Condo. Ass’n v. Champion Aluminum Corp., 2018 IL 122022, ¶ 1. The decision overruled Minton v. The Richards Group of Chicago, which held that a purchaser who “has no recourse to the builder-vendor and has sustained loss due to the faulty and latent defect in their new home caused by the subcontractor” could assert a claim of a breach of the warranty of habitability against the subcontractor. 116 Ill. App. 3d 852, 855 (1983).

In Sienna Court Condo. Ass’n, the plaintiff alleged that the condo building had several latent defects which made individual units and common areas unfit for habitation. 2008 IL 122022 at ¶ 3. The Court rejected the plaintiff’s argument that privity should not be a factor in determining whether a claim for a breach of the warranty of habitability can be asserted. Id. at ¶ 19. The Court also rejected the plaintiff’s argument that claims for a breach warranty of habitability should not be governed by contract law but should instead be governed by tort law analogous to application of strict liability. Id.

The Court reasoned that the economic loss rule, as articulated in Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 91 (1982), refuted the plaintiff’s argument that the implied warranty of habitability should be covered by tort law. 2008 IL 122022 at ¶ 20. Under the economic loss rule, a plaintiff “cannot recover for solely economic loss under the tort theories of strict liability, negligence, and innocent misrepresentation.” National Tank Co., 91 Ill. 2d at 91. The Court explained that the rule prevented plaintiffs from turning a contractual claim into a tort claim. 2008 IL 122022 at ¶ 21. The Court further noted that contractual privity is required for a claim of economic loss, and an economic loss claim is not limited to strict liability claims. Id. Because the plaintiff’s claim was solely for an economic loss, it was a contractual claim in nature; therefore, the Court concluded that “the implied warranty of habitability cannot be characterized as a tort.” Id. at ¶ 22.

The Court also rejected the plaintiff’s argument that warranty of habitability should be governed by tort law because it involves a duty imposed by the courts. Id. at ¶ 23. It reasoned that “an implied term in a contract is no less contractual in nature simply because it is implied by the courts . . . .” Id. The Court noted that the warranty of habitability can be waived under Illinois law, but individuals are not able to waive duties imposed upon them by the courts. Id. If the warranty of habitability was a tort claim, it would “raise[] significant practical problems, particularly for subcontractors” given that they “depend upon contract law and contracts with the general contractor to protect and define their risks and economic expectations.” Id. at ¶ 24. Because a subcontractor’s fees, costs, and liability are controlled by his contracts, turning an implied warranty of habitability claim into a tort would make those contracts pointless. Id.

The Court’s decision to overrule Minton rested on three primary reasons: (1) Minton failed to discuss why the economic loss rule did not apply; (2) Minton did not address what effect its holding would have on the contractual relationships of subcontractors and general contractors; and (3) there is “no authority for the idea that a tort duty comes into and out of existence depending on whether another entity is bankrupt.” Id. at ¶ 25. In light of the opinion, a home purchaser’s remedy where there is economic loss is now limited to those parties with whom it has a direct contractual relationship.

A Section 558.004 Pre-Suit Notice of Defect Tolls Florida’s Ten-Year Statute of Repose for Filing Construction Defect Claims

In prior coverage of Florida’s latest construction law developments, Gordon & Rees provided insight on Florida’s detailed update to its ten-year statute of repose for construction defect claims enacted on June 14, 2017. In the recently decided case of Gindel v. Centex Homes, No. 4D17-2149, 2018 WL 4362058, (Fla. 4th DCA, Sept. 12, 2018), a case of first impression, Florida’s Fourth District Court of Appeal held that serving a contractor with a Section 558 pre-suit notice of construction defect constitutes an “action” under Section 95.11(3)(c) and therefore tolls the statute of repose.

In Gindel, a putative class of individuals purchased townhomes (“Homeowners”) from the defendants, a homebuilder and its subcontractor (“Contractors”) alleging damages due to defective construction of the townhomes. Homeowners closed on and took physical possession of their respective properties on March 31, 2004, thereby triggering the statute of repose under Section 95.11(3)(c), Florida Statutes (the “statute of repose”). After discovering alleged construction defects, Homeowners served the Contractors with a pre-suit notice of defect on February 6, 2014, pursuant to Section 558, Florida Statutes. Contractors rejected the Homeowners’ request to cure the alleged defects. Consequently, Homeowners filed suit against Contractors on May 2, 2014 – 59 days after the statute of repose had expired.

Contractors moved for summary judgment, contending that the statute of repose barred Homeowners’ claims because the action was commenced not at the time the notice of defect was served, but when Homeowners actually filed their lawsuit. The trial court agreed with Contractors and ruled that service of the notice of defect did not commence the action under the statute of repose, filing a lawsuit did, and Homeowners lawsuit had been filed too late. The trial court entered summary judgment in Contractors’ favor. Homeowners appealed the trial court’s judgment.

The issue on appeal was “whether the pre-suit notice required by Chapter 558 qualifies as ‘an action,’ as the term is defined in the statute of repose, sections 95.011 and 95.11(3)(c).”

In answering this question, the court began its analysis with the plain language of Section 95.011 and Section 558 because each of them have their own definition of what constitutes an “action.” Section 95.011 defines an “action” as a “civil action or a proceeding”; Section 558.002(1) defines an “action” as a “civil action or arbitration proceeding.” Thus, as a textual matter, a homeowner’s service of a pre-suit notice of defect does not constitute an “action” within the express definition of either Section 95.011 or Section 558.002(1). Add to that, Section 558.004(1)(a) further makes clear that a pre-suit notice of defect is not an “action” under that Section 558 because it makes a distinction an “action” and a “written notice of claim,” and directs that the latter must be served on a contractor before the former can be filed in court. Importantly, however, as the Gindel Court noted, Section 95.011 and Section 558 are not textually intertwined such that the definition of an “action” under Section 558 must be read into Section 95.011(3)(c). Accordingly, the Court held that the term “action” in Section 95.011 and Section 558 are two separate and distinct terms that do not rely on one another.

The trial court, however, had construed the term “action” in Section 95.011 to mean only a civil action. By ruling that a pre-suit notice of defect is not an “action” under Section 95.011, the trial court effectively struck out the term “proceeding,” which is designed to encompass dispute resolution processes other than a civil action. The trial court’s construction of the statute conflicted with the canon of statutory interpretation that “a statutory provision should not be construed in such a way that it renders the statute meaningless.” Warner v. City of Boca Raton, 887 So. 2d 1023, 1033 n.9 (Fla. 2004).

Next, the Court looked to the Supreme Court’s decision in Raymond James Financial Services, Inc. v. Phillips, 126 So. 3d 186 (Fla. 2013), for guidance. In Raymond James, the Supreme Court had to decide whether an arbitration proceeding constituted an “action” under Section 95.011. The Court resorted to Black’s Law Dictionary for the definition of the word “proceeding,” which means “[a]ny procedural means for seeking redress from a tribunal or agency.” The Court further reasoned that because an arbitration involves a legal process for seeking redress from an “adjudicatory body,” arbitration meets the definition of a “proceeding” under Section 95.011. But in the context of a Section 558 pre-suit notice defect, a homeowner is not commencing an action before a tribunal, but rather, is complying with a require prerequisite to do so. Accordingly, Raymond James can be distinguished from Gindel on those grounds. The proposition that Raymond James stands best for is that the Supreme Court has recognized that a “proceeding” under Section 95.011 may be a process besides a civil action. The holdings in Raymond James and now Gindel leave open the possibility that parties who agree to engage in pre-suit mediation in a non-construction cases before the statute of limitations expires could use pre-suit mediation as a means of tolling the time period to file suit.

Last, the Court looked at the practical purposes behind the Section 558 pre-suit notice of defect requirement. A pre-suit notice of defect is designed to enable the parties to work towards curing any alleged defective construction without first filing a civil action. The only reason the Homeowners in Gindel server a pre-suit notice of defect instead of immediately filing suit is because Section 558.003 expressly prohibits from filing a civil action “without first” “serv[ing] written notice of claim on the” (Section 558.004(1)(a)) defendant. Thus, it would undermine the purpose of Section 558.003 to provide claimants incentive to circumvent the pre-suit claim procedures put in place thereby. But even with that legislative intent in the backdrop, in granting Contractors summary judgment, the trial nonetheless court ruled that Homeowners should have ignored Section 558.003 by commencing their lawsuit and seeking a stay until compliance with Section 558.003 had been effect. The Gindel Court, however, rejected the notion that the Homeowner’s should have had to resort to violating rather than “rightly complying” with Section 558 pre-suit notice of defect requirement.

Thus—and although Gindel likely laid to rest any question as to whether a Section 558 notice of defect tolls the statute of repose—the Homeowners there could have ensured the viability of their claims by filing their lawsuit and contemporaneously serving the notice of defect on the defendant, then moving to stay the action until pursuant to Section 558.003 until the applicable timeframe set forth in Section 558.004(1)(a) expires. Notably, the Court did not disavow this procedure, but held that construction defect claimants are not required to resort to this procedure to comply with the statute of repose if they timely served their notice of defect, and that claimants should not be penalized for adhering to the statutory procedure.

The court ultimately held that the trial court’s summary judgment order was erroneous because Homeowners’ timely service of a pre-suit notice of defect under Section 558 constituted an “action” under Section 95.011, and reversed and remanded the case to the trial court to reinstate the complaint.

Conclusion

Claimants wishing to bring construction defect claims now have clarity from the Gindel decision that service of a Section 558 pre-suit notice of defect, even right up against the expiration of the statute of repose, tolls the time to file suit.

Insurers May Not Be Required to Defend Contractors In a Florida §558 Proceeding

In recent holding1, the Florida Supreme Court held that an insurer may not have a duty to defend a contractor in a Florida §558 proceeding.

Chapter 558 of the Florida Statutes sets forth procedural requirements which must be met before a claimant may file a construction defect action. These requirements include serving a contractor, subcontractor or supplier with written notice of the claim. The contractor, in turn, must serve a written response to the notice of claim in which the contractor provides either an offer to repair the alleged construction defect at no cost to the claimant, resolution of the claim through a monetary payment, a statement disputing the claim, or a statement that any monetary payment will be determined by the recipient’s insurer.2 The claimant may file suit if the contractor disputes the claim and refuses to remedy the alleged defect or provide monetary compensation.

In the case of Altman Contractors, Inc. v. Crum & Forster Specialty Insurance3, Altman Contractors was the general contractor for a condominium project in Broward County, Florida. Altman Contractors was insured by Crum & Forster Specialty Insurance (“C&F”) through seven consecutive one-year commercial general liability policies that were essentially identical. The policies required C&F to defend Altman Contractors against any “suit” seeking damages because of bodily injury or property damage. The policies defined “suit” as follows:

“Suit” means a civil proceeding in which damages because of “bodily injury,” “property damage” or “personal and advertising injury” to which this insurance applies are alleged. “Suit” includes:

  1. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or
  2. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.

The policies did not provide further definitions for “civil proceeding” or “alternative dispute resolution proceeding” as used within the definition of “suit.”

After being served with a §558 notice, Altman Contractors notified C&F of the claims and demanded that C&F defend and indemnify it. C&F denied that the notice invoked its duty to defend because it did not constitute a “suit” as defined by the policy. Altman Contractors ultimately resolved the construction defect claims without a lawsuit being filed and without C&F’s involvement. Altman Contractors then filed suit for declaratory relief in which it sought a declaration that C&F owed a duty to defend and indemnify it under the policies.

The Florida Supreme Court held that Florida’s Chapter 558 notice and repair process “cannot be considered a civil proceeding under the policy terms because the recipient’s participation in the chapter 558 settlement process is not mandatory or adjudicative.”4 Rather, a recipient of a Chapter 558 notice may “choose to not respond and, thereby, force the claimant to file a lawsuit to recover for the identified construction defect.”5 The court nevertheless recognized that the policies’ definition of “suit” included “[a]ny other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”6 The court then held that, while the Chapter 558 process was not a civil proceeding, it was an alternative dispute resolution proceeding under which the insurer’s consent was required to invoke its duty to defend.

Based on this ruling, an insurer is not necessarily required to defend a Florida contractor that received a Chapter 558 notice. The Florida Supreme Court does not interpret Chapter 558 as constituting a “civil proceeding” as defined in many CGL policies. Even if the policy in question contains language pertaining to “alternative dispute resolution proceedings,” the insurer’s duty to defend can only be invoked with its consent. This could have broad ramifications in Florida construction defect actions, as a contractor’s ability to investigate and contest the allegations could be adversely impacted without the assistance of counsel.

______________________________________________

1 Altman Constrs., Inc. v. Crum & Forster Specialty Ins. Co., 232 So.3d 273 (Fla. 2017).
2 See Fla. Stat. § 558.004(5).
3 232 So.3d 273 (Fla. 2017).
4 Id. at 278.
5 Id.
6 Id.

New York’s Scaffolding Law and Strict Liability

According to New York’s Scaffold law (Labor Law § 240(1)), contractors and owners engaged “in the erection, demolition, repairing, altering, painting, cleaning or pointing of a building or structure” must provide ” scaffolding, hoists, stays, ladders, slings, hangers, blocks, pulleys, braces, irons, ropes, and other devices which shall be so constructed, placed and operated as to give proper protection to a person so employed.” Construction attorneys have long believed that this law automatically imposes strict liability on contractors and owners who have failed to provide proper safety measures. However, recent case law may shed some new light on New York’s Scaffolding Law.

In O’Brien v Port Auth. of N.Y. & N.J., 29 N.Y.3d 27 (N.Y. Mar. 30, 2017), a construction worker was injured when he slipped down the stairs of a temporary scaffold while working on a construction site. The worker sued his employer and the property owner and the parties produced conflicting expert testimony regarding the adequacy of the temporary staircases to protect plaintiff against the risk of falling. The court held that the worker’s injury does not necessarily establish a violation of the Scaffolding Law when there are triable issues of fact regarding the adequacy and safety of the staircase. The court refused to rely on the presumption that there wasn’t proper protection in cases involving ladders or scaffolds that malfunction for no apparent reason by noting that there was a triable issue of fact concerning the safety of the staircase.

However, in Kebe v Greenpoint-Goldman Corp., 2017 N.Y. App. Div. LEXIS 3643 (N.Y. App. Div. 1st Dep’t May 9, 2017), the First department upheld the lower court’s decision granting summary judgment for the plaintiff by relying on the presumption that there wasn’t proper protection. In that case, plaintiff was injured after falling from a ladder that he claimed had wobbled, was missing two rubber feet, and had spun and fell over. The court held that there wasn’t a triable issue of fact regarding the ladder’s safety and that the superintendent’s testimony that he saw the ladder standing soon after plaintiff’s fall was insufficient to refute that presumption. Ultimately, the applicability of the presumption that the ladder or scaffolding device was not good enough to afford proper protection turns on whether defendants can raise a triable issue of fact. However, that doesn’t just mean conflicting testimony; there must be legitimate questions of fact in order to prevent strict liability.

Asbestos Exposure for Contractors

The California Supreme Court has ruled that premises owners and employers owed a duty to the employee’s household to prevent take-home exposure to asbestos. For example, claims that the plaintiff was exposed when a family member came home with asbestos fibers on his work clothes. For a more detailed description of the case, click here.

This ruling is more important to the Construction industry given the ruling in Hernandezcueva v. Brady  243 Cal.App.4th 249 from January of this year. In Hernandezcueva, the court found that E.F. Brady was potentially liable for its use of an asbestos-containing drywall joint compound on the job. The Court held that E.F. Brady was not just a contractor, but played a significant role in the stream of commerce of the asbestos-containing joint compound because it:

  1. “Always” provided materials as part of its drywall contract;
  2. Structured its time-and-materials contract to recoup the costs of materials (even “without necessarily ensuring a profit regarding those costs,” in part because the costs were “substantial, as they ordinarily constituted 25 percent of the amount of a bid”);
  3. Had a relationship with manufacturers of asbestos-containing drywall products “sufficient to command the personal attention of [their] representatives to E.F. Brady’s concerns regarding the products” that placed it “‘in a position to exert pressure on the manufacturer’ to improve product safety;” and
  4. Was a large commercial operation and so was “capable of bearing the costs of compensating for injuries due to the products.”

A more through discussion of that case can be found here.

Nevada Supreme Court Holds That a Bad Check Invalidates an Unconditional Release of a Mechanics Lien

What happens if a lower-tiered contractor provides higher-tiered contractor with an unconditional release of mechanics lien rights in exchange for payment by check, only to have that check returned for insufficient funds? This was the scenario presented to the Nevada Supreme Court in Cashman Equipment Co. v. West Edna Assocs., 132 Nev. Adv. Op. 69.

The case involved the construction of the new Las Vegas City Hall. Whiting Turner Contracting (“WTC”) served as the Project general contractor. WTC selected Mojave Electric (“Mojave”) to serve as the Project electrical subcontractor. Cashman Equipment Company (“Cashman”) originally submitted a winning bid to Mojave to provide specialty materials. However, WTC mandated that Mojave involve disadvantaged business entities, so Cam was selected for this purpose to serve as an intermediary between Mojave and Cashman.

Pursuant to their respective agreements, Mojave paid Cam (the intermediary) for services provided by Cashman. In turn, Cam issued a check to Cashman for the equipment provided. Cashman executed an unconditional release of its mechanics lien rights in exchange for the check. However, Cam’s check to Cashman was returned for insufficient funds, and Cashman’s subsequent efforts to obtain payment were unsuccessful (Cam’s owner absconded with the payment from Mojave). As a result, Cashman recorded a mechanics lien and eventually filed suit to foreclose the lien.

The trial court refused to enforce Cashman’s mechanic’s lien and upheld the unconditional release despite the fact that Cashman had not received payment for its work. The trial court also found that Mojave’s payment to Cam constituted payment to Cashman because Mohave’s check to Cam was honored. Cashman appealed to the Nevada Supreme Court.

The Nevada Supreme Court reversed the trial court decision and held that the unconditional release was void. The Court compared the subject release to a “pay-if-paid” provisions commonly found in construction contracts. In a separate case, the Court previously had held that “pay-if-paid” provisions were unenforceable because they violate public policy. Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 124 Nev. 1102, 1118, 197 P.3d 1032, 1042 (2008). Similarly, the Court found that enforcement of the subject release would violate Nevada’s public policy favoring mechanics liens to ensure payment to those who provide labor or furnish materials to improve property. The Court further found that the subject release was statutorily unenforceable pursuant to NRS 108.2457(5)(e), which precludes enforcement of a waiver when the payment exchanged for the release is in the form of a check that fails to clear the bank “…for any reason.”

Although not specifically discussed in this case, Cashman ultimately prevailed because it complied with the specific requirements set forth in Nevada’s mechanics lien statutes. This case is also illustrative of Nevada’s strong public policy protecting contractors’ payment rights.

The Importance of Situational Leverage

George Orwell wrote “all animals are equal, but some animals are more equal than others.” In construction, this is plainly true. The large, multi-billion dollar prime contractor, for example, is unlikely to negotiate subcontract terms with the 7-figure concrete installer. The public agency is unlikely to negotiate design contract terms with the 10-member architectural firm who is designing a new courthouse. But these general guidelines are just that: general (not universal) guidelines (not rules). A party who fails to recognize situations where the leverage has shifted runs the risk of either killing the deal (by demanding that which it is not entitled to) or failing to get as beneficial a bargain as they are entitled to (by failing to appropriately flex their muscle). A brief review of some common situations where the situational leverage differs substantially from ordinary leverage will illustrate some issues to keep an eye out for.

A.  The “Plus Factor” Subcontractor

There are times when a specific subcontractor brings a very specific and rare (or unique) advantage to a project. One example is a subcontractor who holds an SBA, MBE, WBE, DVBE, or LBE designation from the relevant government entity. The prime contractor likely achieves a monetary advantage by contracting with this certified subcontractor, and a smart certified subcontractor will leverage that advantage to bargain for better commercial terms with the prime, whether that takes the form of more money or better subcontract legal terms, or both. Another example is a subcontractor with a special (and rare) material application certification that is necessary for the project, such as a certification to apply an epoxy that is specified in the specifications (and for which a certified installer may also be specified). If the prime contractor adopts its standard, take-it-or-leave-it approach to negotiations with “plus factor” subcontractors, they may quickly find themselves talking to an empty chair. On the flip side of that coin, a “plus factor” subcontractor who accepts an “industry standard” deal is failing to avail itself of the benefits it is commercially entitled to realize.

B.  The “Connected” Subcontractor

Leaving aside jokes regarding East Coast garbage hauling contracts, the fact remains that at times, a subcontractor has a special and useful connection with an important player in the project.  When the design-builder is looking for a design subconsultant, the designer who has designed dozens of projects for the project owner can probably help speed and smooth the process of getting the DB design approved. The electrical subcontractor who performs direct contracts for the public owner of a project can probably help the prime contractor get submittals and test results approved quickly. These advantages are generally less clear and less well known than “plus factor” subcontractors, who enjoy a built-in, knowable, often quantifiable advantage. As such, subcontractors looking to flex this leverage need to be ready to make a convincing case that they actually HAVE the leverage—they need to sell the prime contractor on the existence of the advantage before they try to use that advantage. But subcontractors who have these sorts of connections will be in demand among every prime contractor seeking the work, and so primes would be well-advised to effectively court subcontractors who have a demonstrated, and useful, connection.

C.  The “Competent” Subcontractor in a Busy Market

It seems odd to talk about a subcontractor being competent as though it was a unique advantage. But, as various cities in the U.S. experience construction booms, we can see the repetition of a common cycle. In any up-cycle, the first contractors to become fully utilized (i.e., have all their resources occupied and be unable to take on additional work) are usually the best subcontractors. The last contractors to become fully utilized are usually the newest and/or least experienced. Thus, an owner or prime contractor looking for an excellent contractor or subcontractor to work on a critical aspect of the project may find that the best-qualified candidates are not hungry enough to chase work. These “top tier” contractors will demand favorable commercial terms to work on your project, and in many cases it will be worth it to the owner or prime contractor to accede to a reasonable number of such demands.

Mel Brooks wrote, and Zero Mostel said, “when you got it, flaunt it!” When you find yourself in possession of atypical negotiating power, you are well-advised to strategically, intelligently, and effectively use that power to get a better deal. Similarly, when you find yourself negotiating with such a party, you need to realign your expectations to reflect commercial reality. Failure on either party’s part will result in both of them losing out on a deal that may be beneficial to both parties when strategically negotiated and closed.

Labor Law Compliance – an Essential Issue for the Contractor’s HR Team and Counsel to Consider

Many of my clients come to me with indemnity provisions and construction contracts to review; or mid-construction disputes for delays and extras or post-construction claims for defects. These are typical issues for a “construction lawyer.” What I am seeing more, and have for the last several years are employment and labor-based issues. Recent and upcoming changes in labor laws will make these claims more complicated, and potentially more risky.

Federal and state laws intersect, overlap and occasionally contradict each other in the areas of who qualifies as an “exempt” employee. This is an essential question as it determines whether someone is entitled to overtime pay, or not. For decades, the federal tests (found in Fair Labor Standards Act) for whether an employee is “exempt” were static. Earlier this year, a dramatic change was announced that becomes effective next month.

There are two parts of the test for whether an employee is exempt. The first is a straightforward compensation test – but this is where the dramatic shift occurred. The minimum annual compensation to qualify for “exempt” status has more than doubled. Under the new federal standards, an employee cannot qualify as exempt if their cash compensation (i.e. not including benefits or allowances) exceeds $47,476. There is a second arm is a “duties” test that must be met in addition to the compensation arm.

For contractors, whether your supervisors, office staff, and any other “white collar” workers are exempt and therefore not entitled to overtime compensation must be re-evaluated as of December 1, 2016. Failure to do so may lead you to spending more than you want to budget for legal fees. Overtime compensation, minimum wages, rest and meal breaks and discrimination are other areas of labor and HR law compliance that are frequent pitfalls for all employers.

Gordon & Rees’s construction attorneys work side by side with our labor and employment teams and would be happy to help you make this evaluation or address any other employment or labor legal issues you may have.