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.

Massachusetts SJC Clarifies “Strict Compliance” Standard in Construction Contracts

In Massachusetts, it is well established that a contractor cannot recover damages from a construction contract without first showing that the contractor completely and strictly performed on all of the contract’s terms. Recently, the Massachusetts Supreme Judicial Court narrowed the rule by concluding that complete and strict performance is only required for contract terms relating to the design and construction itself. The high Court explained that non-design / non-construction contract terms are governing by “ordinary contract principles, including the traditional Massachusetts materiality rule.”1

In the case – G4S Tech. LLC v. Mass. Tech. Park Corp. – G4S Tech. LLC (“G4S”) brought suit against Mass. Tech. Park Corp. (“MTPC”) alleging MTPC owed G4S $4 million of a $45 million contract after G4S completed the build of a fiber optic network in western and north central Massachusetts.2 MTPC maintained that they withheld the $4 million because of substantial delays in the project.3 MTPC in turn brought counterclaims against MTPC alleging fraud and violations of the Massachusetts Consumer Rights Act. Specifically, MTPC maintains that G4S fraudulently and intentionally delayed payments to subcontractors in violation of the construction contract.4 The SJC held that the contract provisions dealing with the “timing of payments to subcontractors and the documentation concerning those payments” is not a contractual term relating to the design or the construction of the fiber optic cable itself.5 Thus, the SJC analyzed the alleged violations under the Massachusetts materiality standard as opposed to the strict and complete performance standard.6 In general, a material contract breach (i.e., a breach concerning an essential and inducing feature of the contract) may discharge the non-breaching party from performing on the contract while a minor or ancillary non-material breach generally does not discharge the non-breaching party (but may warrant monetary damages). Here, the SJC decided that the fraudulent recording of subcontractor payment did constitute a material contract breach.

The SJC’s holding in G4S Tech. LLC v. Mass. Tech. Park Corp. is significant for future construction contracts because it shapes different standards and effects for different categories of contractual terms. That is, to the extent a contractual term relates to the design or construction itself, a contractor is required to strictly and completely comply with such terms. The Court reasoned that strict compliance is required to ensure that the “construction itself is done safely and correctly according to design specifications.”7 However, if a contractor fails to strictly comply with a non-design / non-construction term then a court must analyze whether the non-compliance constitutes a material breach or merely a non-material breach and the effect thereof.

Moving forward, Massachusetts contract drafters, contractors, and owners should pay close attention to terms relating directly to the design or construction of a particular project. Interestingly, the SJC chose not to consider the consequences of contract provisions “that are subsidiary to or supportive of the design and construction, but do not directly involve the design and construction itself.”8 As such, future litigants may attempt to argue that particular provisions are merely “supportive” to a project’s design and construction and thus doesn’t require strict compliance. That being said, best practices for contractors remains the same – strictly and fully comply with all terms.

1 G4S Tech. LLC v. Mass. Tech. Park Corp., 479 Mass. 721, 723 (2018).
2 G4S Tech, LLC, 479 Mass at. 721.
3 Id.
4 Id. at 723.
5 Id. at 733.
6 Id. at 734-24.
7 Id. at 731.
8 Id. at 732.

SB 721 – California Multi-Family Buildings New Require Inspections of “EEEs”

Many in the construction industry and multi-family development field have been closely following Senate Bill 721, or the “Balcony Bill,” regarding new requirements for building owners associated with decks and balconies. After almost a dozen amendments, the “Balcony Bill” finally passed in the state legislature with an overwhelming majority and was signed into law September 17th, 2018, by Governor Jerry Brown.

Balconies and decks, called “Exterior Elevated Elements” (“EEE”) in the statute, are common features in most multi-family buildings in California – where better to enjoy the California sun? However, many of the structures have proven to be problematic at best due to complex intersections of construction trades and design issues as well as limited understanding and effectuation of maintenance. Indeed, the “Balcony Bill” arose largely out of an outcry following the 2015 balcony collapse in Berkeley in 2015, which left six young people dead and another seven injured.

Since the average age of apartments in California is over 40 years, a large segment of the real estate rental market will be affected.

What Buildings Must Comply?

Buildings containing three or more multi-family dwelling units are covered by the Balcony Bill. However, due to significant push back from the common interest development community, condominiums are generally excluded. However, condominium conversions sold after January 1, 2019, must comply with the new inspection requirements.

What are the Inspection Requirements?

The bill covers not just “balconies” or “decks” and their associated supports and railings, but all “exterior elevated elements” – which is notably broadly defined to include “balconies, decks, porches, stairways, walkways, and entry structures that extend beyond exterior walls of the building and which have a walking surface that is elevated more than 6 feet above ground level, are design for human occupancy or use, and rely in whole or in substantial part on wood or wood-based products for structural support or stability of the exterior elevated element – and “all associated waterproofing elements.” The new statute applies to multifamily units with 3 or more units.

The owner of an affected building must ensure that the first inspection is completed before January 1, 2025, and subsequent inspections are required every 6 years after January 1, 2025, or by or before January 1, 2031. The inspections must also include any testing needed to evaluate the conditions. Additionally, condominium conversions sold after January 1, 2019 will need the EEE inspection conducted before the first close of escrow of a separate interest/unit.

However, if a project has submitted for permit after January 1, 2019, the inspection must occur no later than 6 years from the date of certificate of occupancy. Thereafter, the inspection must be performed by Jan 1st every six years. If the property was inspected within 3 years prior to January 1, 2019, and a report was issued stating the EEE were in proper working conditions and do not pose a threat to the public health and safety, no further inspection is required until January 1, 2025. If any immediate threat to health and safety are found, the report must identify that and advise if occupants should be kept out of the buildings, if emergency repairs are recommended, or if shoring is needed. If repairs are recommended, the inspector must prepare a report within 45 days and issue it to the owner and the local law enforcement within 15 days of the report’s publication. If emergency repairs are called for, the Owner is obligated to perform preventive measures including preventing occupant access to the EEE until the emergency repairs are completed.

The inspector’s report must include photos, a narrative, and any test results. In addition, the report must include the repair and replacement work to be performed by a licensed and qualified licensed professional per Health & Safety Code section 17922. Notably, the inspection must include a sampling of at least 15% of each type of EEE.

The report must contain:

  • identification of each type of EEE that does not meet the load requirements
  • assessment of the load-bearing components and associated water proofing elements of the EEE using methods that allow for direct visual observation or comparable means for evaluation of their performance
  • the current condition of the EEE
  • expectations of future performance and projected service life
  • recommendations for further inspections needed

In addition, the repair recommendations are to include work to be done in compliance with the recommendations of the licensed professional providing the report, the applicable manufacturer’s specifications, the California Building Standards Code (consistent with Health & Safety Code §17922(d)), and all local jurisdictional requirements.

What has to be done once an inspection occurs?

The inspector must issue a report with the findings and repair recommendations, if any. If repairs are recommended and there is no emergency situation, the owner has 120 days to apply for a permit and once approved, have another 120 days to complete the repairs, they must be completed within 120 days.

Failure to make repairs timely can be costly as well. If the repairs are not done within 180 days, the inspector (who had been hired by the Owner) has to report the Owner to the local enforcement agency and notify the owner. If within 30 days of this notice, the repairs are not completed, the Owner faces mandatory civil penalties based on a fee schedule set by the local authorities (min. $100/day and max $500/day) until the repairs are completed unless the Owner procures an extension of time from the local agency. Moreover, if the fines are assessed, the local agency can record a building safety lien. If the lien is discharged, released, or satisfied, the notice of discharge must be recorded by the local agency and include the amount of the lien, the name of the agency, the street address, the legal description and assessor’s parcel number, and the name and address of the building Owner.

Who can perform the EEE Inspection?

The requirements for an inspector are fairly broad. A licensed architect, civil and structural engineer, a contractor holding an A, B or C-5 licenses for over five years and with experience constructing multi-story wood-frame buildings are all authorized. Additionally, local jurisdictions can allow specific certified building inspectors from recognized state, national or international associations (e.g., International Code Council). However, a contractor who conducts the inspection cannot perform the repairs called out in his or her report.

Owners of multifamily buildings (and likely mixed use where multifamily is included in the project) with balconies, decks or other exterior elevated elements must pay close attention to their buildings and the requirements for testing and inspections, as well as performing timely repairs to avoid liability under this new law. Real estate developers and landowners of common interest developments (i.e., condos) have a sigh of relief, for now, as there is an explicit provision exempting common interest developments from this law. The idea behind the exemption was due to the fact that the Owner would not have as much control when the project is either a condominium or converted to a condominium, if any such “Owner” could be identified. Due to the nature of all new laws, taking time up front to ensure your actions are going to put you in the best position to comply is highly recommended. Be sure to act early to review your properties and retain legal counsel familiar with construction and this new law as well as a qualified consultant to assist in evaluation of the buildings you own.

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.


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.

Teaching An Old Dog New Tricks: The Spearin Doctrine and Design-Build Projects

The United States District Court for the Southern District of California has now held that the Spearin doctrine applies to design-build subcontractors where the subcontractor is expected to design a portion of their work. The case is United States for the use and benefit of Bonita Pipeline, Inc., et al. v. Balfour Beatty Construction, LLC, et al. (“Bonita Pipeline”) (Case No. 3:16-cv-00983-H-AGS).

In Bonita Pipeline, a subcontractor sued the general contractor and its sureties alleging breach of contract, breach of implied warranty, declaratory relief, and recovery under the Miller Act. The subcontractor then filed a motion for partial summary judgment against the general contractor on its declaratory relief cause of action, seeking a finding that the general contractor could not shift legal responsibility for its defective plans and specifications to the subcontractor.

The evidence presented in support and opposition of the motion showed that the general contractor provided incomplete design documents to the subcontractor at the bid stage, and expressly stated they were incomplete. The subcontractor was ultimately awarded the bid, which included design-build structural steel, metal decking, and other amenities. The parties admitted that the plans and specifications could be refined with further design, whereby the subcontract contained language stating that the subcontractor would assume risk of further change (“refinement”) of the plans and specifications. Further, the subcontract stated that the subcontractor was not entitled to additive change orders or an increase in its bid price for “refinements” resulting from the design-build process. Instead, the subcontractor would only be entitled to additional compensation for enhancements requested by the owner.

During the project the subcontractor sought additional compensation for design errors and changes, with the court noting 93 requests for information and 37 change order requests. The subcontractor also finished its work 290 days late.

The Spearin doctrine (named after United States v. Spearin (1918) 248 U.S. 132) generally holds that an owner (or here, general contractor) impliedly warrants the information, plans, and specifications it provides to the general contractor (or here, subcontractor). Citing case law that state law controls the interpretation of Miller Act subcontracts to which the United States is not a party, the Bonita Pipeline court noted that the California Supreme Court approved and applied of the Spearin doctrine, citing Souza & McCue Constr. Co. v. Superior Court of San Benito County (1962) 57 Cal.2d 508, 510 and E.H. Morrill Co. v. State (1967) 65 Cal.2d 787, 792-793. Citing Coleman Eng’g Co. v. N. Am. Aviation, Inc. (1966) 65 Cal.2d 396, 404, the Bonita Pipeline court also noted that the California Supreme Court has extended application of the Spearin doctrine to construction contracts even where there is no government entity involved.

The general contractor argued that the Spearin doctrine did not apply because the project was one of design-build, and the parties expressly acknowledged that the plans and specifications were incomplete at the time of bidding. The subcontractor, in turn, argued that it acknowledged it assumed the risk that the plans and specifications would be “refined,” but the general contractor nonetheless still impliedly warranted that the plans and specifications provided would be correct, even if incomplete.

Ultimately, the Bonita Pipeline court found the subcontractor’s position persuasive, finding that the Spearin doctrine applies to design-build projects. Regardless, the Bonita Pipeline court denied the plaintiff subcontractor’s partial motion for summary judgment, finding that there were insufficient facts in the record to determine whether the contractor’s extra work was due to errors in the plans and specifications, or whether the extra work was due to the design work expected of the subcontractor.

In support of its ruling, the Bonita Pipeline court relied on a United States Court of Federal Claims case, AAB Joint Venture v. United States, 75 Fed.Cl. 414 (Fed.Cl. 2007). In AAB Joint Venture, the plaintiff contractor won a bid to construct a military storage base in Israel, whereby the project was in a design-build format. The plaintiff was provided specifications from the government, and after construction commenced the plaintiff contractor submitted a request for information questioning the accuracy of the specifications. After further requests for information and responses thereto, the plaintiff contractor (and its subcontractors) performed earthwork using 3-inch stone fill, as opposed to a 6-inch maximum stone fill as specified in the contract. The use of the smaller fill, however, precluded use of the contract-specified density test, as the test could not be used on the smaller fill. Thereafter, plaintiff contractor sought an equitable adjustment as a result of the defective specifications and increased costs, which was denied.

The AAB Joint Venture court found that the Spearin doctrine applied to the design-build project. It held that “[t]he purpose of the specifications is to serve as a guide to the contractor … The contractor should be able to rely on a reasonable interpretation of the contract.” “The standard that must be met under the implied warranty is that the specifications will result in a satisfactory, acceptable, or adequate result; short of that, the specifications are defective and the contractor is entitled to an equitable adjustment.” There, the specifications provided a range of sizes for fill that could be used by the subcontractor, though some sizes in turn precluded use of the contract-specified density test. The AAB Joint Venture court held that the fact that the specifications allowed for some satisfactory results did not preclude a finding that they were defective. In other words, “[d]efective specifications may be found when the full scope of the dimension tolerances set forth in the specifications do not produce satisfactory results.”

The Bonita Pipeline court also relied on a Civilian Board of Contract Appeals case, Drennon Constr. & Consulting, Inc. (“Drennon”), 13 B.C.A. (CCH) ¶ 35,213 (2013). In Drennon, the plaintiff contracted with the Bureau of Land Management (“BLM”) to widen a road at a campground in central Alaska. Widening the road required excavating a hillside, and building a gabion wall along the cut. The hillside ultimately collapsed, and the contractor’s work was placed on suspension. Ultimately, the road was widened without the use of a gabion wall, and the contractor sought recovery for its costs during the suspension period, as well as the cost of purchasing gabions for which it no longer had use. The contractor contended that the geotechnical information provided in the BLM’s solicitation was defective. In contrast, the BLM argued that the contract was one of design-build, and that the contractor was not entitled to any recovery because of the contractor’s own faulty design.

The Drennon panel sided with the contractor, finding that the hillside would have collapsed regardless of the approach undertaken by the contractor. The court pointed out that the solicitation included a road design and specifications from the civil and geotechnical engineer. The engineer testified that the digital terrain model it utilized for its design contained inaccurate control points, and that the BLM denied the engineer’s request to perform a survey to address the inaccuracies. On that basis, the engineer testified that they intentionally added language to the solicitation that would have warned potential bidders of the inaccuracies of the model. The Drennon panel found this directly contributed to the increased costs suffered by the contractor. The Drennon panel also found that the engineer’s geotechnical report was defective, noting that the site conditions experienced by the contractor were materially different than what was described in the report.

Bonita Pipeline shows that the Spearin doctrine is still alive and well, and even permeating into modern construction projects. The doctrine’s application to a design-build project at the United States District Court level shows that it is moving of specialized venues such as the Federal Court of Claims and Board of Contract Appeals. The Spearin doctrine reaches its centennial anniversary this year on December 9, 2018.

When to Withhold Retention Payments on Private or Public Projects

To ensure that construction contractors and subcontractors receive timely progress and retention payments, the California Legislature enacted statutes that impose deadlines and penalties on owners and direct (general) contractors who delay payments. (Cal. Civ. Code, §§ 8800, 8802, 8812, 8814; Pub. Contract Code, §§ 7107, 10262.5; Bus. & Prof. Code, § 7108.5.) However, there is an exception to these deadlines and penalties on both private and public projects. The exception allows an owner or direct contractor to withhold payment1 when there is a good faith dispute between an owner and a direct contractor or between a direct contractor and a subcontractor. (Civ. Code, §§ 8800, subd. (b), 8802, subd. (b), 8812, subd. (c), 8814, subd. (c); Pub. Contract Code, §§ 7107, subds. (c), (e), 10262.5, subd. (a); Bus. & Prof. Code, § 7108.5, subd. (a).)

But the term “good faith dispute” has been a source of confusion where direct contractors owe subcontractors retention payments, but want to withhold the payment because of a dispute.2 California appellate courts were split, with one court finding that any type of bona fide dispute justified withholding, and another finding that only disputes related to the payment itself justified withholding. (Compare Martin Brothers Construction, Inc. v. Thompson Pacific Construction, Inc. (2009) 179 Cal.App.4th 1401 [any bona fide dispute could justify withholding] with East West Bank v. Rio School Dist. (2015) 235 Cal.App.4th 742 [disputes related to the payment itself may justify withholding].) In May 2018, the California Supreme Court clarified that for a direct contractor to withhold a retention payment on a private project, the good faith dispute must somehow relate to the payment itself. (United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. (2018) 4 Cal.5th 1082, 1097-1098.)

In United Riggers, a direct contractor and subcontractor disputed the total amount owed to the subcontractor for a project. (United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., supra, 4 Cal.5th at p. 1086.). The subcontractor demanded roughly $350,000 more than the amount authorized by the contract and approved change orders because the direct contractor allegedly mismanaged the project. (Ibid.) When the project owner eventually released the final retention amount, the direct contractor refused to provide the subcontractor with its share of the retention even though the retention payment itself was undisputed. (Ibid.) The subcontractor sued for the late retention payment and for mismanagement of the project. (Ibid.) At trial, the direct contractor prevailed on all claims. The appellate court, however, reversed on the issue of the late retention payment, and the Supreme Court affirmed. (Id. at pp. 1086-1087.)

Although the direct contractor admitted it did not timely pay the subcontractor the retention amount, it claimed that the “good faith dispute” exception under Civil Code section 8814 justified the delay. (United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., supra, 4 Cal.5th at p. 1089.) Section 8814 requires that on private projects, direct contractors pay subcontractors retention payments within 10 days after receiving them from owners unless a good faith dispute exists between a direct contractor and a subcontractor. (Civ. Code, 8814, subds. (a), (c).) The direct contractor argued that because there had been an ongoing dispute about the direct contractor’s alleged mismanagement of the project and the total amount owed to the subcontractor when the direct contractor withheld the retention payment, the withholding had been justified. (United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., supra, 4 Cal.5th at p. 1089.) The subcontractor responded that because the dispute about the direct contractor’s alleged mismanagement of the project and the total amount owed did not directly relate to the retention payment—an amount that was undisputed—the direct contractor had not been justified in withholding it. (See ibid.)

After comparing Section 8814 to other prompt payment statutes and analyzing the legislative history of those statutes, the Supreme Court concluded that Section 8814 permitted retention withholding only where disputes concerned the retention payments themselves. (Id. at pp. 1092-1093, 1097-1098.) The Supreme Court emphasized that this would further the purpose of the prompt payment statutes to ensure timely payment of undisputed amounts, without undercutting contractors’ rights to withhold disputed amounts. (Id. at p. 1097.) Thus, where direct contractors owe retention payments to subcontractors on private projects, direct contractors may withhold retention amounts only where there are good faith disputes relating to those particular payments. (Ibid.)

Notably, although the Supreme Court’s holding concerned Section 8814, which applies only to private projects, the Supreme Court’s holding and reasoning also likely apply where direct contractors owe subcontractors retention payments on public projects. First, the Supreme Court indicated that generally legislators can reasonably anticipate that courts will accord the prompt payment statutes with a common construction. (United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., supra, 4 Cal.5th at p. 1090.) Moreover, the Supreme Court specifically overruled the appellate opinion Martin Brothers Construction, which held that Public Contract Code section 7107 allowed direct contractors to withhold retention proceeds from subcontractors on public projects for any kind of dispute, to the extent Martin Brothers Construction was inconsistent with United Riggers & Erectors. (Id. at pp. 1095-1098.) In doing so, the Supreme Court noted that the opposite twin to the Martin Brothers Construction case, East West Bank, which held that section 7107 did not permit withholding for any kind of dispute, rested upon sound reasoning. (Id. at p. 1096.) Thus, most likely, direct contractors must timely pay retention amounts to subcontractors in the absence of a good faith dispute regarding those particular retention amounts, regardless of whether a project is public or private. (See id. at pp. 1095-1098.)

1 The statutes authorize an owner or direct contractor to withhold up to 150 percent of the amount in controversy.
2 Most of the prompt payment statutes clarify that a good faith dispute must involve a dispute over the specific payment due. But Civil Code section 8814, relating to retention payments from a direct contractor to subcontractor on a private project, and Public Contract Code section 7107, relating to retention payments from a direct contractor to subcontractor on a public project, do not contain express language limiting the good faith dispute to a dispute over the payment due.

Avoid Delay or Get Ready to Pay: The Risks of “Time-Is-of-The-Essence” Clauses

Like death and taxes, construction delays are inevitable. Even the most cautious, diligent contractor may face subcontractor disputes, supply shortages, or inclement weather which slows down a project. Even if the contractor avoids unexpected problems, the sheer complexity of a job may cause a contractor to exceed the deadlines proposed in a contract.

Fortunately, courts recognize the practical reality of construction projects and the unavoidable delays which may arise. Therefore, as a general rule, a contractor is only liable for delayed completion of a project if the delay resulted from the contractor’s unreasonable performance of his or her work. Reasonable performance will typically serve as a defense to a claim of delayed completion. This defense is a vital asset when a contractor surpasses the project’s expected timeframe.

Like many defenses, however, a contractor can contractually waive his or her right to rely on reasonable performance. This type of waiver is referred to as a “time-is-of-the-essence” clause. The American Institute of Architects provides an example of such a clause:

Time limits stated in the Contract Documents are of the essence of the Contract. By executing the Agreement the Contractor confirms that the Contract Time is a reasonable period for performing work.

In its commentary to the example, the AIA explains that this clause makes timely performance an “express condition” of the contract. Any delay by the contractor constitutes a material breach. This clause precludes the contractor from asserting that the deadlines within the contract were unreasonable or that the contractor acted reasonably in attempting to prevent delays.

In light of this, contractors should proceed with caution before agreeing to a “time-is-of-the-essence” clause. Under such an agreement, a contractor’s failure to meet deadlines could excuse the owner’s financial obligations under the contract. Additionally, the owner may pursue a claim for any foreseeable damages stemming from the delay, including expenses, lost revenue, and lost business opportunities. In the context of commercial properties, these damages can be significant.

If a contractor does proceed with a “time-is-of-the-essence” clause, he or she should also consider a liquidated damages clause establishing the specific damages which the owner would recover in the event of a breach. This clause provides certainty to the owner, who avoids the burden of proving actual damages at trial. The clause also minimizes risk for the contractor, who can assess the consequences of a breach prior to commencement of the project. In any contract which identifies time as an express condition of performance, the contractor should consider liquidated damages as a means of mitigating risk.

A contractor should also consider insurability prior to entering into any time-contingent contract. Courts regularly interpret a failure to comply with “time-is-of-the-essence” clauses as a breach of contract rather than an act of negligence. Many insurance policies provide coverage for negligent performance of a contract, but expressly exclude coverage for breach of contract. Other policies may provide coverage only for “wrongful conduct,” which is generally limited to the ream of tortious conduct. Therefore, while an insurance policy may provide coverage for delays caused by a contractor’s unreasonable performance (i.e., negligent performance), the same policy may not provide coverage for a contractor’s failure to comply with a “time-is-of-the-essence” clause.

In the context of litigation, time-contingent contracts expose the contractor to additional theories of liability, reduce the plaintiff’s burden, and limit the contractor’s defenses. The plaintiff can still assert a claim of negligence for unreasonable delay. The plaintiff can simultaneously assert a claim for breach of contract. Even if the jury does not find negligence, it can still award damages under a theory of breach. In defending such a claim, the contractor is limited to contractual defenses such as waiver or impossibility.

Unfortunately, owners often set time-contingent clauses as non-negotiable terms in a contract. In particular, government contracts frequently contain such clauses. Before entering into this type of an agreement, the contractor should carefully evaluate his or her potential exposure as well as applicable insurance coverage in order to mitigate risk.

As a final note, particularly cautious contractors can also consider a “no-damages-for-delay” clause. Under this clause, the owner waives any damages arising out of delays in completion, even if the delays result from unreasonable performance. Courts generally uphold such agreements, which provide further protection to the contractor in the event of a delay.

Designed to Expose: Beware Lender Certificates

Danny the Developer wishes to build Greenacre, a large residential and retail condominium complex in downtown Boston. However, Danny’s lender – the Bank of Barbara – will not lend Danny the money to develop the complex unless Danny’s architect signs a lender certificate. Danny presents the lender certificate to Allie the Architect, the certificate is relatively short and simple, it states:

“Allie the Architect prepared plans and specifications relating to Greenacre. Allie the Architect certifies that the plans are in accordance with all applicable zoning, building, housing and other laws, ordinances, regulations including but not limited to the Federal Fair Housing Act, the Uniform Federal Accessibility Standards, and the Americans with Disability Act. The Plans do not encroach over, across or upon any such easements, rights-of-way, or subsurface rights and the like. Allie further certifies that the load bearing capacity of the soil is adequate to support the plans. The Bank of Barbara shall rely upon Allie the Architects certification in loaning money to Danny the Developer for Greenacre.”

Allie the Architect, visualizing the full-scale version of her brilliant design in the heart of Boston’s skyline, eagerly signs the affidavit. Three years later and about halfway through construction, soil movement causes severe cracking in Greenacre’s foundation. It becomes evident that soil conditions of the land are not capable of supporting the original foundation as designed and are not adequate for Greenacre’s long-term support. Repairing and rebuilding the foundation will increase the cost of the project 25% and delay Greenacre’s opening for an additional two-years. Danny the developer, unable to handle the unexpected costs and delayed opening, defaults on his loan with the Bank of Barbara. Subsequently, Danny the Developer and the Bank of Barbara sue Allie the Architect for breach of contract and breach of express warranty. Specifically, the parties allege that Allie the Architect falsely represented in the lender certificate that the soil was adequate to support Greenacre.

Allie the Architect is shocked by the lawsuit and doesn’t understand how she can be liable when she was merely involved in the design of the building itself. She is also shocked when she receives a “Reservation of Rights” letter from her E&O carrier saying that her policy only provides coverage for claims based on negligence, not claims such as those here that are based on breaches of express warranty. This ROR letter explains that if she is found liable for the Lender’s claims, she will be on her own – the insurer will not pay the judgment. When Allie consults a lawyer – something she should have done before signing the lender certificate – she confesses/complains: “I had no knowledge regarding the nuances of the land where Greenacre would rest, I had no involvement in the soil or geotechnical engineering, all information regarding the soil and land was provided to me by Danny the Developer. How is this happening?” The lawyer explains the lender certificate is the root of her liability. The certification Allie signed contained representations as to the soil condition as it existed. Despite having relied on what Danny the Developer told her, Allie opened herself up to liability by signing a document in which she certified/warranted/promised that the soil conditions were adequate to support her design.

Sadly, Allie’s situation is not unique. Many lending agents require design professional to execute certifications like the one described above. These certifications often include representations and warranties that open design professional to exposure and potential liability that would not have existed otherwise.

Essentially, lender certificates give the lender someone to sue if a project goes wrong. Lender certificates are usually proffered as a “mandatory pre-requisite” to a lender’s financing and such certificates offer little to no benefit to the design professional. By signing a lender certificate with such overbroad representation and warranties, a design professional risks becoming a scapegoat for many possible problems. By design, lender certificates create exposure and potential liability—precisely why many are drafted to include broad and overreaching language. Oftentimes lender certificates require a design professional to represent and warrant as to facts and services which are not within their personal knowledge, scope of service, or expertise. In the case of Allie the Architect, the lender certificate included language regarding the adequacy of soil conditions when Allie should not have made any representations based on her own knowledge and expertise.

What are some ways to help minimize risk for design professionals when reviewing and signing lender certificates? In the absence of not signing the certificate entirely (often not an option), design professionals should carefully review any representations and warranties (with their experienced construction lawyer) to ensure the certificate only includes facts that are known to him or her at the time of signing. Additionally, the language of the certificate should only extend to the scope of the design professionals’ services. Further, the design professional should identify any information provided to him or her by a third-party.

Often times design professionals feel as though they have no leverage when asked to sign a lender certificate. A design professional might think “If I do not sign, then the bank simply will not loan my client the money, the project won’t go forward and I won’t earn a fee.” Regardless of whether that is true, a design professional must determine if they feel comfortable taking on a great deal of risk so their client can secure financing. If a design professional feels compelled to sign then they should consider adding a provision to limit liability. For example, “It is understood and agreed that the information contained herein is for the client’s use, without any responsibility or liability of the architect to any lending institution who may rely on the said information in relation to lenders financing of the client’s project.” An indemnification provision can be used to shift liability away from the design professional and avoid future litigation. Another good antidote to an overbroad certificate is to revise the “certifying” language. Instead of saying that the design professional “warrants and certifies” the following facts, the certificate should be revised to state that the design professional “represents upon information and belief” the following facts. Despite any such provisions, the best practice is to have a lawyer review the lender certificate prior to signing as such certificates tend to be a trap for the innocent.

It’s Time to Change the Way You Think About Case Complexity

There are few things that lawyers love more than telling war stories. Partially, that’s because many lawyers either only or primarily have friends who are lawyers, and war stories are a way for lawyers to relate to each other—your barber doesn’t understand the pain of reading through 5 paragraphs of irrelevant objections posed to each of 75 interrogatories, but your fellow lawyers will. One common feature of war stories is a note regarding how much was at issue in the case. “I was handling this $25 million claim once….” Lawyers include the dollar figure in dispute as a shorthand for the complexity of the case they’re talking about. “Oh, we’ll be in depositions for a month solid, this is a $10 million case!”

I don’t know where I picked up this habit, but I know exactly how I learned to rethink it. A friend of mine, as in-house counsel, was handling a case worth over a billion dollars. When he told me about it, my jaw dropped. One of the first things I asked him was, how do you manage a case that big? And he told me about the several law firms he had engaged, all the people working on it. But then he said: it’s not really a complicated case. There were only 4-5 real factual questions, and a similar number of legal ones. It’s just that every factual question had a very high price tag associated with it. The high price tag doesn’t make the factual question any more complex, or any harder to litigate. For example, your builders’ risk policy either has coverage for flood damage or it doesn’t. If it does, then it doesn’t matter whether the flood washed the whole building away or just some materials from the laydown area—coverage is coverage, irrespective of quantum.

I recently arbitrated a case where $20 million in claims hinged on the interpretation of a single clause in a single sentence in a 30+ page contract. The quantum of damages that hung on the resolution of the meaning of that clause did not affect how complicated it was to interpret that clause. And at the conclusion of the arbitration, the panel interpreted that clause to mean what most people off the street would have told you it meant. Put differently, the interpretation of that clause, and evidence that could be offered in aid of that interpretation, would have been exactly the same had the claim been $100,000, $1,000,000, or the $20 million actually claimed. The damages claim had no effect on the complexity posed by the interpretation of that sentence.

I do not mean to suggest that damages claims don’t pose their own problems. Sometimes (but not always), as damages claims grow, their formulation does become more complex, although seldom does the complexity increase linearly with the growth of the quantum. I do, however, mean to suggest that lawyers should shed our collective habit of using the claimed damages as a shorthand measurement for the complexity of the case. Sturdza v. United Arab Emirates, 281 F.3d 1287 (D.C. Cir. 2002) is an example of a highly complicated case where the eventual damages, had the plaintiff prevailed, would have amounted to the low six figures. In contrast, the lawsuit by developer Larry Silverstein (the owner of the World Trade Center buildings in New York) against his property insurers posed a simple question (did the Sept. 11, 2001 terrorist attack count as one or two occurrences under the applicable insurance policies), whose resolution was worth $3.55 billion. The $3.55 billion price tag did not make the insurance policies’ language any more convoluted, complicated, or harder to parse than the language would have been had the damages been only $35.5 million.

Even if you otherwise agree with me, you might well ask: okay, it’s a bad habit, but so what? What’s the harm? Ultimately, the answer is simple: the lawyer’s view of the complexity of the case colors every bit of advice he or she gives the client. How many document custodians to harvest ESI from. How many discovery motions to fight, and how hard to fight them. How many depositions to take. Lawyers have a related bad habit of using a certain percentage of the amount as issue (I’ve heard between 10% and 30%) as a “rule of thumb” for budgeting purposes, such that a $10 million case ought to have a legal fees and costs budget of between $1 and $3 million. As long as we keep using the damages claim as a shorthand for the complexity of the case, we’re going to continue to give clients bad advice—advice that is keyed to a level of complexity (high or low) that the case doesn’t actually have.

Rather than asking how much is at issue, lawyers (both in-house and outside) should ask: what factual or legal questions control the resolution of this case? How hard are those questions to answer? Where will the evidence that answers these questions be found? Don’t collect ESI from 20 custodians because it’s a $20,000,000 case; do collect ESI from 20 custodians if each of them is likely to possess information critical to the resolution of key factual questions. In short, stop making decisions based on the quantum of damages being sought, and start making them based on the issues that affect entitlement to those damages. When your strategy is guided by the factual complexity of the case, rather than the quantum of damages being sought, the solutions you craft for your clients will more accurately reflect what really needs to be done in the case.