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Daniel E. Fierstein is Co-Editor of Construction Law Now and an Associate in the Firm's Construction Group. He focuses his practice on construction law and counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals. Dan represents these clients at all phases of construction from contract negotiation through project closeout.

Dan can be reached at dfierstein@cohenseglias.com or 215.564.1700.

As schools across the country open, most people in the Delaware Valley are well aware of the School District of Philadelphia’s financial woes. As the School District considers measures to help close its massive budget deficit, it has recently begun to take legal action that is particularly interesting.

The Lawsuits

About one month ago, the School District sued more than twenty design professionals that it enlisted for various school improvements as part of the District’s Capital Improvement Program. The goal? To recoup approximately $2 million in damages related to alleged deficiencies in the drawings and specifications for the various school improvement projects.

At this stage in the litigation, there is very little information available, as only Writs of Summons were filed. But, it is believed that the School District’s claims may arise out of a number of change orders issued to prime contractors on the projects in question. In theory, if the change orders were issued because of errors and omissions and not scope changes, design professionals may be liable.

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The Upshot

Given the severe budgetary woes, it is not difficult to fathom why people may draw a connection between the School District’s shortfall and its recent litigation activity. Motive aside, this series of lawsuits is likely to affect the manner in which future School District contracts are drafted and administered. Though the implications remain to be seen, for future projects, it would not be surprising to see more tightly and thoroughly drafted contract documents and a more stringent change order process. It will also be interesting to see whether the litigation has a chilling effect and dissuades professionals or contractors from working for the School District in the future.

We will continue to monitor these cases and the potential implications for construction work administered by the City of Philadelphia, its agencies, authorities and departments.

Lane F. Kelman is a Partner with the Firm and a member of the Construction Group. He represents developers, general contractors, construction managers and the different trades in complex matters ranging from bid protests, contract negotiations and claim prevention & management.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. 

A few weeks ago, the New Jersey Supreme Court issued a decision that could have a profound effect on members of New Jersey’s construction community.  In Town of Kearny v. Louis F. Brandt, the Court issued two major holdings: (i) under New Jersey’s Statute of Repose, an architect with construction administration responsibilities cannot be sued for defective work more than ten years after the first temporary certificate of occupancy (TCO) is issued; and (ii) if a party is dismissed because more than ten years has elapsed since its work, the jury may still consider the dismissed party’s contribution to any damages for the purpose of determining liability for the remaining parties to the litigation.

What Is a Statute of Repose and Why Does It Matter?

For those who possessed the courage to continue reading beyond that “legal mumbo jumbo,” a Statute of Repose is a law that protects design professionals and contractors from indefinite liability.  In New Jersey, the Statute of Repose bars all litigation arising out of construction defects discovered more than ten years after the performance of the work.  For instance, a structural engineer need not worry about being sued for a latent design defect that surfaces twenty years after it performed the design work.

In Town of Kearny, construction of a public safety facility started in 1994, and the Town sued the architect, soils engineer, and structural engineer for latent structural defects on April 7, 2006.  The Court decided that for professionals like the architect whose responsibilities continue through construction, the ten-year Statute of Repose begins to run when the project reaches substantial completion.  In this case, the Court decided that substantial completion occurred on April 9, 1996 when the first TCO was issued giving the owner until April 9, 2006 to sue the architect.

For the soils and structural engineers who were hired to perform more finite and limited services, the ten-year period began to run at the conclusion of their specific tasks.  Since the soils and structural engineers completed their work more than ten years before the owner filed suit, they were dismissed from the case, leaving only the architect subject to liability.

What Happens to the Architect Now That Other Potentially Responsible Parties Have Been Dismissed?

In cases with multiple defendants who may have collectively contributed to the damages plaintiff suffered, the jury is asked to determine – on a percentage basis – each party’s responsibility.  For instance, if a jury awards a verdict of one million dollars and finds two defendants each fifty percent responsible, respectively, then each defendant is liable to the plaintiff for $500,000.00.

But what happens in situations like Kearny where two of the parties who may have been responsible for the Town of Kearny’s damages were dismissed on a statutory technicality?  The Court decided that even though the soils and structural engineers are immune from judgment by way of the Statute of Repose, the jury should nonetheless consider their contribution to the Town’s damages because the purpose for the rule requiring juries to determine each party’s contribution to the damages is so that each party pays for the damages it actually caused.  In other words, if the architect is responsible for less than 100% of the town’s damages, it would not be fair for the architect to pay 100% simply because the other defendants were dismissed by way of the Statute of Repose.

The Lesson

While the discovery of latent construction defects can be outside of the owner’s control, owners should nonetheless be mindful that New Jersey’s Statute of Repose does not treat all contractors and professionals equally.  For those with limited responsibilities that began and end prior to the project’s overall completion, the clock to file a lawsuit begins ticking once the specific work is completed.  For those with construction management or administrative responsibilities, the clock begins to run when the project is substantially complete.

Without agreement among the parties as to substantial completion, Town of Kearny tells us that a court will likely utilize the issue date for the first TCO.  Owners can guard against the “ticking clock” by keeping a close watch on the various completion dates for each trade.  Meanwhile, designers and builders can ensure that the clock is ticking by being vigilant with the submission and approval of critical project documents such as certificates of substantial completion.

Jonathan A. Cass is a the Chair of the Insurance Coverage & Risk Management Group at Cohen Seglias Pallas Greenhall & Furman PC. He has extensive experience representing insureds and insurers in insurance coverage disputes.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

As members of the construction industry know, to describe the relationship between a surety and the party to whom it issues a surety bond (the principal) as confusing would be an understatement.  In fact, many believe that the surety-principal relationship is similar, if not identical, to the insurer-insured relationship. In a recent federal court opinion – Reginella Construction Company, Ltd. v. Travelers Casualty and Surety Company of America – a contractor learned the hard way that the principal in a surety-principal relationship is not nearly as protected as the insured in an insurer-insured relationship.

The Case

In Reginella, the United States District Court for the Western District of Pennsylvania granted a surety’s motion to dismiss the claims brought against it by the surety’s principal, Reginella, finding, among other things, that a surety does not owe the kind of heightened duty to its principal that an insurance carrier owes to its insured (this heightened obligation is called a fiduciary duty, and we tend to see it in the insurer-insured, attorney-client, trustee-beneficiary, and guardian-ward contexts).  In Reginella, the surety, Travelers, issued performance and payment bonds on behalf of its principal, Reginella, for a school district project in Pennsylvania and a turnpike project in Ohio.

On the school district project, Reginella’s relationship with the owner broke down, and the project shutdown.  On the turnpike project, Reginella’s relationship with Travelers soured over a disagreement surrounding a lien filed by one of Reginella’s subcontractors.  Reginella alleges that Travelers failed to, among other things, (i) pay Reginella’s subcontractors in accordance with the payment bonds that Travelers issued, (ii) issue a bond to address a subcontractor lien, and (iii) generally act in the best interests of Reginella in a way that would facilitate payment from the project owners to Reginella.

Ultimately, Reginella sued Travelers for damages in excess of $15 million for lost business, goodwill, future earnings and residual value of its enterprise against Travelers for, among other claims, Travelers’ alleged breach of its fiduciary duty owed to Reginella in relation to the bonds issued on the two projects.  Travelers moved to dismiss the entirety of Reginella’s claims.  In applying Pennsylvania law, the Court granted Travelers’ motion and dismissed Reginella’s claims against Travelers, concluding that a Pennsylvania court would not impose fiduciary duties on a surety because a surety is a guarantor issuing a commercial guaranty, not an insurance carrier issuing an insurance policy.

What Does It All Mean?

The Court’s decision makes it clear that in Pennsylvania, a surety’s obligations to its principal are not the same as the heightened obligations that exist in fiduciary relationships.  In a fiduciary relationship, the fiduciary (e.g., an insurer) must act with the utmost fairness and refrain from using his position to the other’s detriment and his own advantage.  As the Court determined, however, surety relationships are ordinary arm’s-length commercial relationships where each party owes the other a less protected duty of good faith and fair dealing.  When entering into surety relationships, contractors need to be mindful of this distinction, especially when a surety begins communicating with project owners on its principal’s behalf.

Principals like Reginella should carefully monitor the surety’s activity and insist on being copied on all communications to and from the surety.

It is important to note that a couple of weeks ago, Reginella asked the Court to reconsider and alter its decision.  Therefore, the Court’s decision is not yet final, and we will continue to monitor the result.

John A. Greenhall is a Partner with the Firm and a member of the Construction Group. He can be reached at 215.564.1700 or jgreenhall@cohenseglias.com.

Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Lori practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

Employers doing business in the City of Philadelphia must pay taxes on wages (including salaries, commissions, and other forms of compensation) and net profits. A new ordinance shores up current enforcement mechanisms, arming the City with aggressive penalties on overdue taxes and giving private citizens an enforcement role.

About Ordinance 19-1509

Under Ordinance 19-1509, an employer with an overdue tax bill could face a law suit from the City Solicitor and could be liable for attorneys’ fees, interest, and penalties to the tune of two to three times the amount of taxes overdue.

To prevail, the City must show that the employer knowingly committed a Wage Tax or Net Profit Tax Law violation, conspired to violate the laws, or was involved in falsified tax records related to compliance with the laws. The bar for “knowledge” is fairly low, allowing an employer to be on the hook for damages if it (i) actually knows the taxes are unpaid, (ii) turns a blind eye to the unpaid taxes, or (iii) recklessly disregards the fact that wage and net profit taxes are not paid. The same rules apply to falsification of tax records.

Private Citizen Referrals

The Ordinance not only empowers the City Solicitor, but it also creates enforcement rights for private citizens. A private citizen may refer a case to the City Solicitor for investigation, and may even litigate the claim with or on behalf of the City Solicitor. In fact, the law incentivizes private citizen referrals by awarding, in some instances, a 15 to 25 percent award from proceeds of a successful recovery. The Ordinance also contains a clause prohibiting retaliation by an employer against whistleblowing employees.

The Moral of the Story

With such potentially devastating penalties at stake, employers must ensure that they pay wage and net profit taxes on time, and vigilantly maintain current and accurate tax records. Employers should also consult regularly with a responsible tax professional. If faced with a claim by the City Solicitor and/or private citizen, an employer should cooperate, refrain from taking any adverse action against any employees involved, and immediately contact legal counsel.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

Catherine Nguyen is an Associate in the Construction Group and concentrates her practice in the area of construction litigation. She has represented clients in construction litigation, contract disputes, landlord-tenant matters and consumer protection cases.

The Backdrop

Since the Recession of 2008, the story of the construction project that fell through shortly after breaking ground has repeated itself far too frequently.  In too many of these situations, financing dries up, leaving owners without project funds to pay general contractors and general contractors without funds to pay early-phase subcontractors who have already performed their work (e.g., demolition, excavation, and site work).  With that uplifting backdrop, let’s discuss how these circumstances affect mechanics’ lien rights.

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As many of our readers know, mechanics’ lien claims are powerful tools for contractors to ensure that they get paid for their work by “encumber[ing] the owner’s property and, if taken to their logical end, force a sale of the property to pay creditors.”  A recent case in the Superior Court of Pennsylvania brought to light the issue of mechanics’ lien rights on buildings that go un-built.

In B.N. Excavating, Inc. v. PBC Hollow-A, L.P. and PBC Hollowb, L.P., a site contractor (“BN Excavating”) was hired as a subcontractor to perform excavation work for the proposed construction of a two-building project.  BN Excavating performed its work, but the buildings were never actually constructed.  The contractor that hired BN Excavating never paid for the work, so BN Excavating filed a mechanics’ lien claim on the property.

The owner argued that BN Excavating’s lien was invalid because the buildings were never actually erected.  The Superior Court, however, allowed BN Excavating’s claim to proceed because the excavation work was incidental to planned construction.  In other words, the Court held that BN Excavating’s lien rights were tied to the existence of a construction plan, not to the ultimate fulfillment of that plan.

The Take-Away

For contractors, subcontractors, and suppliers who perform site work can rest easier knowing that your lien rights are tied to the nature of your work and not whether a building is ultimately erected.   It is nonetheless critical for you to supply your attorney with detailed information about the project, so that he or she drafts the mechanics’ lien claim in a way that makes clear that your work was part of a construction plan.

For owners and developers, understand that the Mechanics’ Lien Law could be unsympathetic to situations in which a construction project falls through before a building is erected.  Predecessor work such as demolition and excavation will still be protected under the Mechanics’ Lien Law.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

Trevor Taniguchi, a summer associate with Cohen Seglias, contributed to this post.

Jennifer M. Horn will be participating in a panel discussion focused on how you can manage the financial, legal, and technical liabilities and risks when using Building Information Modeling (BIM).

Reserve your seat today!

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Event Details:

Wednesday, June 12, 2013

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Cockeysville, MD 21030

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For most people, there is only one thing more excruciating than a discussion about insurance coverage: a blog post about it.  So brace yourselves dear readers.

With all kidding aside, the importance for contractors and owners to understand the ins and outs of their insurance policies, and the risk transfer mechanisms that they are using, or are being subject to, cannot be oversInsurance Policy.jpgtated.  Members of the construction industry should be generally familiar with the individual concepts of commercial general liability (“CGL”), additional insured status, and contractual indemnification, but few understand how they fit together and, worse, how their synergies can cause unintended and costly consequences.  It gets even worse when a liability policy called an Owners and Contractors Protective Liability policy (“OCP Policy”) is thrown into the mix.

In recent years, we have seen owners increasingly requesting that our contractor clients purchase an OCP Policy.  An OCP Policy is a policy that is specific to a construction project that insures the owner for personal and property damage arising out of the work of a designated contractor.  It differs from the more commonly utilized additional insured concept in that the OCP Policy only covers the owner, instead of the contractor and owner together under the contractor’s CGL policy.

Owners like it because an OCP Policy can provide broader coverage than that provided under an additional insured endorsement, and provides them with coverage limits that they do not need to share among any other parties in the event of an insured claim.  Contractors like it because an OCP Policy typically provide primary insurance coverage, which means in the event of an accident arising from the contractor’s work that leads to a claim against the owner, the OCP Policy’s limits will be tapped by the owner, rather than the contractor’s CGL policy providing coverage to the owner as an additional insured.  (This is true even if the owner has also required a contractor to name the owner as an additional insured on the contractor’s CGL Policy).

The concern and unintended consequences of which contractors must be aware arises in cases where the owner, in addition to requiring the contractor to purchase the OCP Policy, also requires the contractor, pursuant to the construction contract, to indemnify the owner for personal injury and property damage arising from the negligence of the contractors in performing its work.  In practice, if an accident occurs during construction – say an employee of a subcontractor is injured – the employee will sue both the contractor and owner.  The owner will respond by tendering its defense and seeking indemnification from the insurance carrier that issued the OCP Policy.  The contractor, in turn, tenders to its own CGL carrier, expecting that the OCP carrier will defend the owner, and its CGL carrier will defend it.

However,  what we have seen occur is that the attorney appointed to defend the owner by the OCP carrier then asserts a claim for contractual indemnification against the contractor, and demands that the contractor defend and indemnify the owner pursuant to the indemnification provision in the construction contract.  Although the contractor will typically have contractual liability coverage under its CGL policy for such an indemnification claim, the contractor’s efforts to insulate its own CGL policy from having to pay claims asserted against the owner by purchasing the OCP policy have been thwarted.  Not only did the contractor have to pay for an entirely separate OCP policy for the owner, but once coverage under the OCP Policy is triggered, the OCP carrier circles back and dumps the claim back on the contractor’s CGL policy through the construction contract’s indemnification provision.  Simply put, the contractor pays for the OCP Policy, and then faces increased CGL premiums because of the costs associated with responding to the contractual indemnification obligation.

The lesson to be learned?  It is important for contractors (and owners) to understand the interplay between an OCP Policy, additional insured status, and a contractual indemnification provision.  To the extent that an owner is demanding that a contractor purchase an OCP Policy, the contractor should attempt to negotiate the elimination of any contractual indemnification provision that requires the contractor to defend and indemnify the owner for personal injury and property damage – the very same claims covered by the OCP Policy.  In doing so, the contractor can avoid the scenario discussed above.

Jonathan A. Cass is a the Chair of the Insurance Coverage & Risk Management Group at Cohen Seglias Pallas Greenhall & Furman PC. He has extensive experience representing insureds and insurers in insurance coverage disputes.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

Public construction work can be attractive to contractors, especially in a down economy, because the payments are considered more certain and secure than with private work.  One major pitfall of public work, however, is that legal recourse against a government entity can be much more limited than against a private owner.  In a recent case against the Commonwealth of Pennsylvania (Commonwealth), a gaming company, Scientific Games International (SGI), learned the hard way that taking legal action against the Commonwealth is considerably more difficult than doing so in a private construction context.

The difficulty stems from legal principal called sovereign immunity.  Sovereign immunity means that a government entity like the Commonwealth cannot be sued except under very limited circumstances that are determined by the Legislature.  For example, if a contractor is not being paid for work in accordance with its contract with the Commonwealth, the contractor may (after going through an administrative claim process) sue the Commonwealth for breach of contract because the Legislature expressly created this remedy in the Commonwealth Procurement Code.

In Scientific Games International, Inc. v. Commonwealth of Pennsylvania, the Commonwealth solicited bids for the design, installation, and maintenance of a statewide computer system to monitor slot machines at gaming venues.  After bids were opened and evaluated, the Commonwealth selected SGI for the award and began to negotiate a contract with SGI.  Before contract documents were fully executed (the final draft of the contract had been signed by SGI but not by the Commonwealth), the Commonwealth cancelled the award, noting that the cancellation was “in the best interests of the Commonwealth.”  SGI sued the Commonwealth in the Commonwealth Court of Pennsylvania seeking an order from the court that declaring the contract enforceable and preventing the Commonwealth from canceling the contract.

Ultimately, the case went up to the Supreme Court of Pennsylvania, which dismissed SGI’s case because the Commonwealth Procurement Code does not allow bidders to challenge award cancellations if they have not yet entered into a fully executed contract with the Commonwealth.  In other words, since the Procurement Code says that cancellations cannot be challenged without a fully executed contract, the Commonwealth is immune from legal challenges.

In addition to confirming the Commonwealth’s ability to cancel solicitations and awards without challenge, the Supreme Court of Pennsylvania also held that even if SGI was permitted to bring this lawsuit against the Commonwealth, it did so in the wrong forum.  The Supreme Court concluded that SGI should have filed its case with the Commonwealth Board of Claims because the Commonwealth Procurement Code requires all claims arising from contracts with the Commonwealth and/or its agencies to be brought before the Board of Claims.

For contractors, this case should serve as a lesson that their legal rights are significantly limited without a fully executed contract.  Following an award, contractors should strive to negotiate quickly and efficiently and push the Commonwealth to execute the contract as quickly as possible (electronic signatures have become an acceptable means for the Commonwealth to execute its contracts).  For construction lawyers, this case should serve as a lesson that the proper forum for all disputes with a Commonwealth agency arising out of a contract is the Commonwealth Board of Claims, not the Commonwealth Court.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

Please join us for a professional panel covering the technological, financial, and legal aspects of:

  • History of BIM
  • Future of BIM
  • Benefits and Risks of BIM
  • BIM Documentation and the Effects
  • Case Studies
  • Top 5 Takeaways by Industry Experts

Agenda:
3:30 p.m.   Registration

4:00 p.m.   Welcome and Introductions Technical Overview by Print-O-Stat, Inc.

4:30 p.m.   Professional Panel Discussion and Dinner Served

6:00 p.m.   Ask a Pro: with Industry Experts from:

  • Print-O-Stat, Inc.
  • Jennifer Horn, Esq. – Cohen Seglias Pallas Greenhall & Furman PC
  • Stambaugh Ness, PC

6:45 p.m.   Social Networking Hour

Date:
March 20, 2013

Cost:
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Out Door Country Club
1157 Detweiler Drive
York, PA 17404

For additional information and to register, please use this form.

One of the most commonly overlooked yet critically impactful provisions of a construction contract is a notice provision.  In their most typical form, a contractual notice provision will require contractors to provide written notice to their customers to advise them of critical project issues (e.g., delays and claims for extra work) that may require additional time or compensation.  The provision usually requires the contractor to provide the written notice within days of becoming aware of the issue and also provides that if a contractor fails to comply with the written notice requirement, it is not entitled to the relief it seeks such as an extension of time to complete the project or additional compensation for extra work.

The concept seems reasonable.  Owners should be entitled to know about potentially costly issues as they develop so that they can deal with them up front before they become more costly or problematic.  But the effect on contractors can be devastating.  For instance, a contractor could leave hundreds of thousands of dollars of legitimate extra costs on the table simply because it verbally advised its customer of the issue and the associated cost while on site but never in writing.  While some courts or arbitrators may overlook a contractor’s less formal compliance with contractual notice provisions and allow them to proceed with a claim, others will be unsympathetic to the contractor’s gripe.

The lessons to take from this reality, though seemingly obvious, are critically important:

  • Read your construction contracts thoroughly before signing them, and, if there is room for negotiation, consider striking the writing requirement of the notice provision so that actual or constructive notice is sufficient.
  • Read and understand all of the notice provisions in the contract (in many instances, there will be a multistep process that begins with general written notice and includes following up with a formal written change request or alternative dispute resolution).
  • Advise the appropriate employees at your company of the notice requirement at the beginning of the project.
  • Memorialize every time and cost impact on the job that you consider worth pursuing as a claim as they develop, and advise your customer in writing.  Provide regular written updates to your customer.

At the end of the day, contractors should strive to comply strictly with contractual notice provisions because relying upon a judge or arbitrator to be lenient can be a risky and costly proposition.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.