President’s Message - May 2017
By Matthew W. Nakon, Esq., President
Welcome to our Firm’s Spring 2017 edition of Direct Examination. This edition focuses on a complex and fascinating area of the law, construction. At WHP, our construction law practice happens to be led by our Newsletter’s editor, Phil Truax. In this edition, you will find contributions from Phil and several other of our lawyers touching on topics impacting the construction industry. Note that much of what is written may apply equally to other industries, but we hope you will find these short articles helpful.
On another exciting note for the Firm, I am happy to introduce Art Gibbs as part of the WHP team. Art joins us as Chairperson of the Firm’s Probate & Estate Planning Group. Art is highly respected and widely recognized for his expertise in estate planning, trust, and probate law. He is licensed to practice in Ohio and Florida, and will focus on providing estate, tax, and business succession planning to business owners, individuals, financial institutions, and non-profits. Art also has a significant fiduciary litigation practice, representing trustees, executors, and beneficiaries in various trust and estate disputes. We welcome Art’s experience and leadership to our Firm.
If we can answer any questions or be of service to you, you know where to reach us. Have a wonderful Spring and Go Tribe!
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Several years ago, Ohio’s legislature passed a law to provide subcontractors and material suppliers with a formidable weapon to protect their payment rights – the Ohio Prompt Payment Act. ORC 4113.62 requires that subcontractors and suppliers be paid within 10 days of their customers being paid for their work or material. Generally speaking, any subcontractor or supplier that is not timely paid is entitled to 18% interest on its unpaid balance plus its legal fees spent pursuing the balance. This was and continues to be a clear public mandate that Ohio wants those companies actually furnishing the labor, equipment and material to be timely and fully paid (not to take anything away from self-performing general or prime contractors…)
Under ORC 4113.62(C), however, the protections of the Ohio Prompt Payment Act do not apply to most residential construction projects. In other words, if a subcontractor or material supplier furnishing labor, equipment, or material for a home construction project is not paid by the builder, who is actually paid for that subcontractor’s or supplier’s work, the unpaid sub or supplier has no claim for higher interest or legal fees (absent provisions in the parties’ contract providing those remedies). There may be any number of reasons why residential subcontractors do not receive the protections that commercial subcontractors receive, but frankly, I can’t think of one. The lack of prompt pay protection for residential subcontractors is perplexing, especially considering the safety net given to homeowners against subcontractor mechanic’s liens (i.e., subcontractors and suppliers have no mechanic’s lien rights on residential projects where the homeowner has paid the builder in full).
As a result, the only reasonable course of action any subcontractor or material supplier can take when performing work or furnishing materials at residential projects is to ensure that its controlling contract provides for convincing incentives for timely payment. Without that, an unpaid vendor is left with far weaker weapons to fight for payment. It may be time then to update those proposal forms to provide for the necessary protection in the event of non-payment.
A recent court case from a Federal Appeals court out of Maryland should cause contractors to re-examine their relationships with subcontractors and their employees. In that case, Salinas v. Commercial Interiors, the employees of a subcontractor sued both the subcontractor and general contractor for violations of the Fair Labor Standards Act and similar state laws. The employees argued the general and the sub were their “joint employers”, meaning both were liable for the acts of the other. Despite the fact that there was a written subcontractor agreement between the general contractor and the subcontractor, the Court of Appeals found the general contractor to be a joint employer with the sub and held the general contractor would be liable for unpaid wages. In doing so, the court issued a new standard on how a joint employer status is determined.
Historically, in determining if a joint employer relationship existed, courts reviewed the relationship between the general contractor and a subcontractor’s employees. Whether a general contractor was a joint employer was determined by how much control the general contractor had over the subcontractor’s employees. The Salinas case rejected those tests. Instead, the court said the test should examine whether the general contractor and subcontractor are “completely disassociated” from one another. The Salinas court asks one essential question: do the parties share responsibility for the essential terms and conditions of employment?
In answering that question, the Salinas court considered several factors, among them, whether the two employers jointly control or supervise the workers. In Salinas, the court found the general contractor to be a joint employer due to several facts, including that the subcontractor worked almost exclusively for the general contractor, the general provided all the tools for the employees, the general required the employees to attend its own safety meetings, the general maintained sign in sheets for the employees, the general determined how many of the subcontractor’s employees would work on any given day, and the general supervised the employees’ work. Based on that, the court found that the general contractor was not “completely disassociated” from the subcontractor, and therefore was a joint employer liable for the unpaid wages.
Although this case is not binding on Ohio courts, there is the possibility the test for the joint employer status is adopted in or around Ohio. Contractors should examine their business practices with their subcontractors to ensure that there is enough separation between themselves and the subcontractors’ employees. Although a general contractor may need to maintain a degree of control over how a project is conducted, the subcontractors should be given a fair degree of control over who they hire and the manner and means in which the subcontractors’ employees perform their work. By implementing additional separation from the subcontractors, general contractors should avoid liability from their subcontractors’ employment disputes.
Weather Delays – When Are They Compensable - May 2017
Provisions relating to weather delays in a construction contract are nothing new to most contractors. These provisions usually provide that delays resulting from inclement weather will entitle the contractor or subcontractor to more time to complete the project, and in some circumstances, that weather delays are not only excusable, but are compensable. That is, the contractor is entitled to additional time, and additional money. Contractually, however, the reverse may be true.
Damages resulting from weather delays can be waived subject to what many know as “no damages for delay” provisions. Ohio’s Fairness in Contracting Act prohibits waiver of liability “when the cause of the delay is a proximate result of the owner’s act or failure to act.” But if the controlling contract waives delay damages, and the subject delay is purely a weather delay outside the control of the owner, the contractor may be without any right to an adjustment of the contract price, no matter what it has to do to timely complete the project. The analysis does not end there, though.
In that same scenario, where a weather delay may be compensable is when it is the result of a delay on the part of the owner. Let’s say, for example, a preliminary portion of the contract was scheduled to be completed in early fall, but delays on the part of the owner result in that portion of the project being pushed to the winter. Then during the winter, extreme temperatures or snowfall prevent the initial phase of the project being completed per the schedule. The owner may complain that it can’t control the weather, but it was the owner’s delay that initiated the chain of events which ultimately led to the project being thrown off schedule by the weather. If the nature of the project makes this scenario a real-life possibility, contractors should consider negotiating language in their contracts protecting themselves in the case of weather delays.
Construct the Proper Succession - May 2017
In the construction world, the parties spend a lot of time planning the project before it starts. Typically, such careful planning allows for the project to go as smoothly as possible. Having a project go according to plan and smoothly is good for everyone involved for any number of reasons. If what you just read makes sense and you are shaking your head in the affirmative, then why haven’t you spent that level of effort on planning for your own business’s succession?
In my experience, the reason is that it is incredibly difficult to think about the business you built in the hands of someone else. This feeling is not unusual and very typical. However, do not let it paralyze you from doing the necessary planning to transition the business to your family, your employees, or a strategic or financial buyer in an efficient manner. Doing so is not only important for you and your family, but also for your employees. If nobody knows what you have in mind for your business beyond you, there will be confusion within the family and uncertainty among your employees as they will begin to worry about their futures and may even perhaps look for other opportunities. This could have the unfortunate byproduct of making your business more difficult to run (whether you are there or not) and less attractive to a financial or strategic buyer interested in a strong, well-positioned management team. So what are you waiting for? At the very least, begin the conversation and learn what succession planning is all about and how to construct a proper plan that makes sense for you and all involved. A proper plan allows for a smooth project; so too will one allow for a smooth business succession.
Most contractors and construction professionals understand that it is critical to obtain financing before beginning the project. Why is this? Well, this question has come in recently and the answer is you might not get the financing you are expecting!
Professionals and contractors alike know that sizable construction jobs start with a recorded Notice of Commencement, which puts the world on notice that construction is taking place and contractors will be on site. The Notice of Commencement has two other important purposes:
First, the Notice of Commencement tells the world that the contractors on site are doing work and expect to be paid (and have statutory Mechanics’ Lien rights). Second, and possibly more important, is that the Notice of Commencement is a recorded document establishing priority of the project in the real property that is the subject of the project.
This second item is where lenders get cranky if the project has begun before financing has closed and the lender has recorded its customary mortgage (and likely other protections like Assignments of Rents and Leases). If the project starts ahead of financing and the Notice of Commencement is properly filed, there is a strong argument that contractors working on the job before the Mortgage is filed can come first in time for payment (even downstream in some instances) from the property itself. This is never a problem in a successful project but a huge problem in a project with cost overruns or that is bid extremely thin. This ability to prime the lender will fairly concern and often scare most lenders because they are providing the funds and expect to be repaid first in all events, and especially in the event of a distressed project.
This concern of risk of re-payment will cause lenders to “run for the hills” when faced with this situation, and disappoint even the strongest of contractor relationships and subterfuge an otherwise promising project. So, keep this in mind for the next project, and be certain that all interested parties take action in the right order, preserving the rights (and cash) from the funding sources.
Developers and project managers routinely rely on multiple professionals at the start-up of a particular project. Land is appraised, surveyed and inspected. Plans are engineered, drafted, and redrafted. Often, a design error by an engineer or similar professional is not evident until years after services have been rendered and in some instances, well after a project is complete. For example, a developer may rely on a surveyor to accurately describe a development’s boundaries, only to be challenged five years down the road with a trespass claim by a neighboring land owner. Assuming the survey was inaccurate and the developer has built upon his neighbor’s land, what remedy does the developer have?
It depends in large part upon whether the action is considered a breach of contract or a professional negligence claim. Ordinarily, claims for breach of contract may be brought within eight years of the breach but professional negligence actions must be brought within in four years of when the faulty services are rendered. Although some courts have extended this to permit additional time if the injured party had no reason to know or learn it was damaged, that is an uphill battle. This is particularly true if the operative documents simply impose a duty upon the professional to perform within industry standards. The longer, eight year statute of limitations applicable to breach of contract actions make it beneficial for a developer or project manager to have a detailed services contract with these types of professionals including indemnification and other provisions should they incur unforeseen costs or have to defend a lawsuit brought by a third party as a result of a faulty survey, design or inspection.
Many employers, including construction contractors and material suppliers, attempt to protect their business by having their employees sign non-competition, non-solicitation, non-disclosure, and/or confidentiality agreements. Recently, courts appear to be more closely scrutinizing such agreements and rendering rulings that are more advantageous to employees. To overcome this trend, employers have wisely started to focus on enforcing the confidentiality and trade secrets provisions of such agreements, rather than the general non-competition clauses. While cases such as these are always very fact specific, one point is clear: successful enforcement of confidentiality and trade secret provisions requires more than simply having the employee sign an agreement. The employer must make reasonable efforts to ensure the information is kept secret.
Under Ohio law, information is protected only if it is subject to “efforts that are reasonable under the circumstances to maintain its secrecy.” In PatientPoint Network Solutions, LLC v. Contextmedia, Inc., the Southern District of Ohio ruled that the employer failed to take the steps necessary to protect its trade secrets when it failed to have an employee sign a non-disclosure agreement until fourteen months after he started working for the company, there was no evidence other employees were required to sign confidentiality agreements and the company failed to make any written demand that the employee return company-issued electronics or other proprietary information for more than six months after his termination.
What this decision emphasizes is that employers must establish procedures and protocols to ensure that their proprietary information is actually protected. Evaluating who has access to such information and making sure those employees are subject to a confidentiality/non-disclosure agreement should be the first step.