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October 23, 2014

Mechanics' Liens: Part 5. Personal Liability Notices

shutterstock_206177620.jpgWe've been examining the role of mechanics' liens in construction contacts, including the way that reallocate credit risk among contractors and the owner of a construction project. The Indiana Mechanics' Lien Statute includes another remedy for subcontractors who do not get paid, entirely apart from a mechanic's lien against the real property where the construction takes place. The statute does not give a name to the remedy, but it's often called a personal liability notice or PLN.

To see how it works, let's go back to the hypothetical example of our last article. Assume you are a subcontractor with a $15,000 claim against the general contractor, a claim the GC disputes. Now let's assume that the deadline for filing a sworn statement and notice of intention to hold a mechanic's lien has already slipped by. Are you out of luck?

Not necessarily. First, remember from our earlier articles that the failure to acquire a mechanic's lien does not affect your breach of contract claim against the GC. All it does is provide collateral to secure that claim, so you still have the right to sue the GC for breach of contract. But that's not all. The PLN gives you a second way to transfer the GC's credit risk to the owner

Who may send a Personal Liability Notice?

The remedy of a PLN is available to subcontractors, lessors leasing construction or other equipment or tools, journeymen, and laborers. That's most, but not all, of the people who would also be entitled to a lien. (Note: Are suppliers of materials entitled to a PLN? That's an interesting question but one that we're not going to answer now. We might take it up someday in another article, but not this time.)

What should the notice say?

To assert a claim of personal liability against the owner, you must send a written notice to the owner that includes:

  • The name and mailing address of the owner of the property as shown on the records of the county auditor or assessor

  • The location of the property, preferably a legal description but at least the street address.

  • The amount of the claim

  • The name of the person who owes you money (in our hypothetical example, the general contractor)

  • A statement that the named person is indebted to you or owes you money

  • A statement that you are holding the owner of the property liable to you for payment of that amount

  • A description of the services that you provided for which you are owed payment

(Technically, not all of these items may be strictly required, but a good notice should include them.)

Then what?

Once the owner receives the notice, the owner is directly liable to you, but only to the extent that the owner owes money to the general contractor, including money that may be currently owed and money that may be owed in the future. In other words, if, at the time the owner receives your notice the owner owes the general contractor $2,000 on an invoice that the owner has already received and the contractor later submits invoices to the owner for another $10,000, the owner will be liable to you for $12,000 of the $15,000 you are owed. If the owner has already paid the general contractor in full for the entire project, the owner has no liability to you.

What if the general contractor has been fully paid for the project that I worked on but holds another contract with the same owner for another project on the same property?

In that case, the owner still has no liability to you. In essence, the PLN gives you a claim to money that the owner has yet to pay to the general contractor under the contract that covered the work you performed, but not to money that the owner may owe the general contractor for other reasons.

How long do I have to send the PLN?

There is no strict deadline equivalent to the one that applies to mechanics' liens. You can send a PLN at any time; however, your claim against the owner is only for the amount that the owner still owes the general contractor. Once the owner has fully paid the general contractor, the owner has no liability to you.

Interestingly, the statute also allows you to send a PLN to the owner even before you do the work. In that case, of course, your notice must include the total amount that you will be owed for all the work you're contracted to perform and a description of that work. Doing so may not make you very popular with either the general contractor or the owner because it creates additional concerns for both of them, but you have the right to do so and, once you do, the owner is liable to you even after the general contractor is fully paid.

Okay, I sent the PLN. Now what?

Most likely, you will enter into discussions with the owner. If you, the GC, and the owner reach an agreement on the amount you are actually owed, a common practice is for the owner to issue a two-party check, payable to you and the GC, in the amount that you are owed, then the GC will endorse the check over to you. If you can't reach an agreement, you can sue both the GC and the owner, making sure you file the lawsuit before the statute of limitations for breach of contract expires.

Continue reading "Mechanics' Liens: Part 5. Personal Liability Notices" »

October 18, 2014

Mechanics' Liens: Part 4. Enforcing a Lien

iStock_000017631785_ExtraSmall.jpgSo far we've looked at the basics of subcontracting and allocation of credit risk, how a mechanic's lien changes things by reallocating credit risk, and how a contractor, subcontractor, supplier, or worker goes about acquiring a mechanic's lien. Now let's assume you are a subcontractor with a claim against the general contractor, or GC, for $15,000. The GC has withheld that amount from your fees, accusing you of not finishing your work on schedule. The general contractor says it incurred $15,000 in additional labor charges because its workers had to wait around with nothing else to do until your work was completed. You blame the general contractor for the delay and additional expense, and you have recorded a sworn statement and notice of intention to hold a mechanic's lien in the amount of $15,000. A copy of it has been sent to the owner.

Now what happens?

At this point, there are several possibilities.

  • What you hope will happen is that either the owner or the GC will pay you - you hope it will be the entire amount but more likely it will be a negotiated compromise amount - in exchange for your signed release, which will then be filed with the county recorder. If the owner pays you, it will probably turn into a dispute between the GC and the owner, but you will not be involved (except as a witness).

  • If the owner believes there is a flaw in the lien, for example that it was recorded too late, the owner can challenge the lien in court, asking the court to remove it. If the owner is successful, it does not mean that you lose your claim. You will still have a breach of contract claim against the GC, but, if you win that case, your ability to collect will turn on the ability of the GC to pay. (Remember that earlier discussion of credit risk? The lien reallocates the GC's credit risk to the owner because the owner's property serves as collateral to secure your claim. Without the lien, the GC's credit risk falls back on you.) By the way, recording a lien that is invalid can make you liable to the owner for a tort known as slander of title.

  • The owner can post a bond to serve as substitute collateral and ask the court to order that the lien be released. That removes the owner from the middle of your dispute with the GC. If you sue the GC for breach of contract and win, and if the GC does not pay you the amount of the judgment, you can collect from the surety who underwrote the bond. (In essence, the GC's credit risk is again reallocated to the surety who charges a fee to assume that risk.) This process is often called "bonding off" a lien.

  • The owner and GC can wait to see if you sue to enforce the lien. If you do not sue within one year, the lien expires. If that happens, you will still have your claim against the GC because the statute of limitations on your breach of contract claim is either six or ten years. (See our earlier blog for a discussion of the uncertainty in the exact amount of time you have to sue the GC.)

  • The owner can send you a letterdemanding that you sue to enforce the lien within 30 days. If you do not, you lose the lien. It's sort of a put-up-or-shut-up provision in the mechanic's lien statute that gives the owner a way to speed things along.

  • You can sue to foreclose on the lien. However, to do that successfully, you will have to prove that the GC actually owes you the $15,000, which means you will have to litigate your breach of contract claim against the GC. Although there are a few different procedural paths to get there, the lawsuit will involve you, the GC, and the owner. If you lose on the breach of contract claim against the GC, the court will order the lien to be removed. If you win on the breach of contract claim against the GC, and the GC pays you the amount of the judgment, the lien will be removed. If the GC does not pay you the amount of the judgment, the owner can pay you, and the lien will be removed. If you win against the GC and neither the GC nor the owner pays you, you can force a sale of the owner's property, with the amount of the judgment being paid to you out of the proceeds of the sale and the balance paid to the owner.

As we've discussed, all the lien really does is to reallocate to the owner the risk that the GC will not pay you the amount you are properly owed. In most cases, if you win your breach of contract case against the GC, the GC will pay the judgment and the lien will be removed without the need for you to foreclose.

So what good does a mechanic's lien do? Really?

In the case of a mechanic's lien filed by a general contractor, the lien provides the GC with collateral to secure its claim against the owner. That can be very important if the owner goes into bankruptcy because the GC will be a secured creditor rather than an unsecured creditor. Of course, in most cases, if the GC wins its claim against the owner, the owner will pay and the lien will be removed. In addtion, sometimes it gives the owner an additional incentive to settle a claim by the GC because selling the property will be more difficult while the lien is in place. (Of course, if the owner really wants to sell the property, the owner can bond off the lien, albeit at the expense of having to pay for the bond.)

From a legal perspective, things aren't much different for a lien recorded by a subcontractor, but as a practical matter, the ability to record a lien gives the subcontractor more leverage in negotiating a resolution to a dispute. The lien will bring the owner into the discussion, and that may provide the GC (or higher tier subcontractor, as applicable) with additional incentive to settle your claim.

Continue reading "Mechanics' Liens: Part 4. Enforcing a Lien" »

October 17, 2014

Mechanics' Liens: Part 3. Acquiring a Lien

iStock_000016437727_ExtraSmall.jpgThis is the third in a series of articles dealing with mechanics' liens. In the first one, we discussed the basics of credit risks associated with subcontracting in an area other than construction. In the second, we examined how a mechanic's lien reallocates those credit risks for construction contracts. In this one, we explain how a contractor or subcontactor goes about acquiring a mechanic's lien. For a change of pace, we'll do it in a question-and-answer format.

Some caveats: First, mechanic's lien requirement vary significantly from state to state. Given that this is the Indiana Business Law Blog, we'll answer the questions based on Indiana law. Also note that the Indiana Mechanic's Lien Statute is filled with complicated, cumbersome, even archaic language that can be difficult for even lawyers to parse, so we'll try to give answers that are more easily understood. However, that also means we may leave out some details, making the answers a bit imprecise in some circumstances. As always, this blog is not legal advice and you should not rely on it as a substitute for legal advice.

Who can acquire a mechanic's lien?

Generally, anyone who furnishes labor, materials, or equipment (including leased equipment or tools) to the construction, repair, or removal of a building or structure, or to any other earth moving operation, is entitled to a mechanic's lien on the building or structure and the land where the construction, repair, or removal was performed. In addition, registered architects, registered engineers, and registered land surveyors are entitled to hold a mechanic's lien. The person who provides the labor, material, or equipment may do so in a contract directly with the owner of the land or under a subcontract.

How does someone go about acquiring a lien?

First things first. On some types of projects -- specifically on the original construction a single or double family dwelling, intended to be the residence of the owner of the land on which it is built, or on the repair or alteration of an owner-occupied single or double family dwelling -- there is a requirement for a "pre-lien notice." Anyone providing labor, material or equipment to such a project must notify the owner in writing that the person is providing the labor, material, or equipment and that the person has rights to a mechanic's lien, unless the person provides the labor, material, or equipment in a contract directly with the owner. (The idea is that the owner already knows about the people who hold contracts directly with the owner.) If the project is the new construction of the dwelling, the notice must be given within 60 days after the person first provides labor, material, or equipment to the project. If it is the repair of a dwelling rather than new construction, the notice is due within 30 days. If the notice isn't given, there's no right to a lien later.

Does the pre-lien notice have to be recorded in the office of the county recorder?

No. It has to be in writing and furnished to the occupying owner or the owner of record of the property, but it does not have to be recorded.

Okay, assume the person provided a pre-lien notice or that no pre-lien notice was required. Now what?

A person entitled to a lien must file, in duplicate, in the office of the county recorder a sworn statement and notice of intention to hold a lien. The sworn statement and notice of intention to hold a lien must include all of the following information:

  • the name and address of the person making the claim

  • the amount of the claim

  • the owner's name and last address as shown on the county's property tax records

  • both the street address and legal description of the property where the project is located.

The statement must be notarized and satisfy all other requirements for recording documents.

The statement and notice must be filed within either 60 days or 90 days of the last day the person making the claim furnished labor, materials, or equipment to the project. The deadline is 60 days for "Class 2" structures -- essentially single or double family dwelling units and related structures--and 90 days for all others. The lien attaches immediately when the notice is filed with the county recorder. The county recorder will then send a copy of the statement and notice to the owner.

Continue reading "Mechanics' Liens: Part 3. Acquiring a Lien" »

October 5, 2014

Mechanics' Liens: Part 2. Reallocating credit risk in construction projects

shutterstock_206177620.jpgIn part 1 of this series on mechanics' liens, we discussed a hypothetical situation with a company that hired an ad agency, with the ad agency subcontracting some work to a production company and purchasing advertising time on a television station. The production company bore the ad agency's credit risk because its contract was with the ad agency, and when the ad agency went out of business the production company faced the possibility of not being paid. In contrast, the television station did not bear the ad agency's credit risk because its contract with directly with the ad agency's client. The ad agency's client faced the possibility of having to pay for the television air time twice - once to the ad agency and a second time directly to the television station when the ad agency failed to pay for the air time on the client's behalf.

Now let's look at the credit risks associated with a construction project in which the owner of a construction project hires a general contractor to complete the entire project on a time-and-materials basis, which means that the price paid by the owner is equal to the amount the general contractor pays for the labor (i.e., the "time") and materials required to do the construction, plus a markup to cover overhead and profit. The general contractor does some of the work with its own employees and subcontracts some of the work, including the installation of the electrical wiring, to another contractor.

The electrical subcontractor completes its work and submits its invoice to the general contractor. The general contractor adds its markup to the amount of the subcontractor's invoice and submits its own invoice to the owner. The owner pays the general contractor, but before the general contractor pays the subcontractor, the general contractor goes into bankruptcy. As we saw before, the subcontractor faces the possibility of not being paid for its work; in other words, the subcontractor bears the credit risk of the general contractor. The subcontractor has no claim against the owner because there's no contractual relationship directly between the owner and the subcontractor.

Or at least that would be the case if it were not for the subcontractor's right to a mechanic's lien. The Indiana Mechanic's Lien Statute (Ind. Code 32-28-3) allows a person who provides labor or materials to the improvement of real property (in this case, the electrical subcontractor) to hold a lien on the property. Ultimately, the electrical subcontractor can foreclose on the lien, forcing the property to be sold at auction, with the proceeds of the sale being used to pay the subcontractor and any remaining proceeds going to the owner. As a practical matter, what usually happens is that the owner of the property pays the subcontractor directly, and the subcontractor releases the lien. Instead of the subcontractor not getting paid, the owner has to pay twice.

In other words, the mechanic's lien statute reallocates the credit risk of the general contractor so that it is borne by the owner of the property, not by the subcontractor. Technically, that's an oversimplification because if the property does not bring enough at auction to pay the subcontractor in full, the owner has no obligation to make up the difference, but the point remains that the mechanic's lien statute rearranges the allocation of the general contractor's credit risk, reducing the risk to subcontractors and assigning it to the owner.

In the next blog entry, we'll start an in-depth look at mechanics' liens, starting with the perspective of a subcontractor.

Continue reading "Mechanics' Liens: Part 2. Reallocating credit risk in construction projects" »

October 2, 2014

Mechanics' Liens: Part 1. The basics of credit risk and subcontracting

shutterstock_91856543.jpgThis starts a short series of blog articles discussing mechanics' liens and their cousins, notices of personal liability, concepts that arise in the context of construction contracts and similar agreements. To understand what's special about construction contracts, you need to understand a bit about how contract law, subcontracting, and credit risk work in other settings. So let's review the basics.

Imagine your company signs an advertising agency agreement, hiring the ad agency to create a television advertising campaign for your business. The ad agency comes up with the ideas for the commercials, hires a production company to produce them, and purchases advertising time on your behalf from local television stations. The contract to produce the commercial is between the ad agency and the production company, but the contract with the television station is between the television station and your company, signed by the ad agency as your company's agent, as it is authorized to do by the ad agency agreement.

All seems to go well, and you pay the advertising agency the full amount your company owes under the agency agreement, including money that the ad agency is supposed to pay to the television stations on your behalf. Then the advertising agency goes belly-up. It closes its doors, fires all its employees, and files for bankruptcy. Among its unpaid creditors are the production company that produced your commercial and a television station that aired it. Can the production company and the television station force your company to pay them what they should have been received from the ad agency?

Under these facts, there are two different answers. The production company is a subcontractor to the ad agency. It has no claim against your company simply because it does not have a contract with your company. The only thing the production company can do is file a proof of claim in the ad agency's bankruptcy and hope to recover something.

In contrast, the television station's contract was with your company, not with the ad agency, and your company is directly responsible for the amount owed to the television station. You'll have to pay the television station (even though you've already paid the ad agency money that was supposed to go to the television station) and hope you can recover something on your company's own proof of claim in the bankruptcy based on the ad agency's breach of contract (or some other possible legal theories that we won't go into).

In producing the commercials without getting paid first, the production company took on the ad agency's credit risk, and your company does not bear it. However, by paying the ad agency the money the ad agency was supposed to go to the television station, your company took on the ad agency's credit risk, and that risk does not fall on the television station. In the next blog entry, we'll examine how mechanics' liens change that allocation of risk for construction contracts.

Continue reading "Mechanics' Liens: Part 1. The basics of credit risk and subcontracting" »

September 11, 2013

Home Improvement Contracts

House painter.jpgIndiana has a relatively little known statute, the Home Improvement Contracts statute located in Title 24, Article 25, Chapter 11 of the Indiana Code, that protects the customers of home improvement contractors by establishing certain minimum contract requirements. Home improvement contractors are well advised to ensure that their contracts comply with the statute because those who violate it may find themselves on the receiving end of a lawsuit under companion Chapter 0.5 (Deceptive Consumer Sales) filed either by their customers or by the Indiana Attorney General. This article describes only some of the statutory requirements, and home improvement contractors who want to make sure they comply should seek legal advice.

Applicability

The Home Improvement Contacts statute applies to contracts between a consumer and a "home improvement supplier" for any alteration, repair, replacement, reconstruction, or other modification to residential property, whether the consumer owns, leases, or rents the residence, but only if the contract is for more than $150. The statute defines "home improvement supplier" as someone who engages in or solicits home improvement contracts, even if that person does not actually do the work. For example, if a homeowner buys installed carpet from a carpet store, the contract to install the carpet is covered by the Home Improvement Contracts statute even if the store owner doesn't actually perform the installation but instead subcontracts the work to someone else.

Contract Requirements

Not surprisingly, home improvement contracts must be in writing. Although the Home Improvement Contracts statute does not include an express requirement for a written contract, and although the definition of "home improvement contract" includes oral agreements, as a practical matter it is impossible for an oral contract to comply with the statute.

Section 10(a) of the Home Improvement Contracts statute includes a laundry list of requirements. For example, the contract must include the name of the consumer and address of the home; the name, address, and telephone number of the contractor; the date the contract was presented to the consumer; a reasonably detailed description of the work; if specifications are not included in the description, then a statement that specifications will be provided separately and are subject to consumer approval; approximate start and end dates for the work; a statement of contingencies that may seriously alter the completion date; and the contract price.

The requirement that the contract contain specifications (or a statement that specifications will be supplied later for approval by the consumer) deserves a little more attention. The statute defines specifications as "the plans, detailed drawings, lists of materials, or other methods customarily used in the home improvement industry as a whole to describe with particularity the work, workmanship, materials, and quality of materials for each home improvement." Note that a specification must describe the work, workmanship, materials, and quality of materials with particularity.

Consider, for example, a contract to paint the exterior of a home. Does it comply with the requirement for a contract to contain specifications if the only description of the work is, "Paint all exterior siding and window frames with gray exterior latex paint"? Does that describe the work "with particularity"? Probably not. For example, it does not specify the number of coats of paint, obviously a significant consideration. Moreover, the specification of "exterior latex paint" is probably inadequate in light of the range of quality and prices of exterior latex paint available on the market, and "gray" is probably not specific enough either, given that paint stores carry a wide spectrum of colors that can reasonably be called gray.

Specific Requirements and Accommodations for Work Covered by Insurance

Section 10(b) of the statute deals with special issues presented by contracts to repair damage that is to be covered by an insurance policy. Several of the provisions provide alternative ways for the contract to comply with the general requirements listed in Section 10(a). For example, the requirement to include the start date can be satisfied by specifying that the repairs will begin within a specified amount of time after it is approved by the insurance company. Similarly, the contract price can be expressed by stating the amount owed by the consumer in addition to the amount of the insurance proceeds, and that includes a contract provision that the contractor will not charge the consumer any amount above the amount of the insurance proceeds. Note, however, that because of the prohibitions in Section 10.5 (discussed below), the consumer is responsible for any insurance deductible.

More importantly, Section 10(b) requires home improvement contracts for repairing exterior damage that covered by insurance to give the consumer a right to cancel the contract within three days of receiving notice from the insurance company denying coverage for some or all of the repairs. The contract must include some very specific language dealing with the right to cancel, and it also must include a form, attached to but easily removable from the contract, that the consumer can use to cancel the contract.

Prohibitions

Section 10.5 of the statute also contains some prohibitions that home improvement contractors need to know about. One has already been mentioned -- contractors are prohibited from paying or rebating to the consumer any part of an insurance deductible or giving any sort of gift, allowance, or anything else of monetary value to the consumer to cover the insurance deductible, including things like referral fees and payments in exchange for the consumer allowing the contractor to place a sign in the yard.

As another example, Section 10.5(d) contains a blanket prohibition on home improvement contractors acting as public adjusters.

Continue reading "Home Improvement Contracts" »

September 7, 2012

Construction Manager Liability: Part three


Construction contract.jpgI explained in my last two posts how construction managers can be subject to liability when a construction contractor's employee is injured. Ordinarily, the construction manager has no duty to provide a safe workplace for the employees of a construction contractor and, therefore, is generally not liable for injuries to those employees. However, a construction manager can assume a duty to those employees in one of two ways -- either by contract or by actions -- and end up with liability for injuries.

For that reason, some construction managers have been reluctant to have any involvement with safety programs. By drafting contracts carefully, a construction manager can be fairly certain of not assuming a duty contractually, but it is difficult to know exactly what actions a construction manager can or cannot take without incurring liability. The Plan-Tec and Hunt cases discussed in our last post create some certainty. Specifically, a construction manager may take on contractual commitments to perform certain actions without assuming a duty to the employees of construction contractors and, consequentially, without incurring liability it would not otherwise have.

However, the construction management must avoid contractually undertaking to be the "insurer of safety for everyone on the project." Here are some examples of what a construction manager should include in the construction management contract:

(a) To "make certain its avoidance of liability" the court in Hunt said a construction manager can include a provision with language expressly disavowing responsibility for job-site safety (EX: "in no case shall...the Construction Manager...have either direct or indirect responsibility for matters relative to Project safety.").

(b) In Plan-Tec, the court held that the construction manager had not assumed a duty because the construction management contract "unequivocally state[d] that the contractors were to have the responsibility for project safety and the safety of their employees." This language demonstrates that the responsibility for project safety belonged to the construction contractors, not the construction manager.

(c) Hunt's contract stated that the construction manager's services were "rendered solely for the benefit of the [Project Owner] and not for the benefit of the Contractors, the Architect, or other parties performing Work or services with respect to the Project." This confirmed that no one but the Project Owner, not even a subcontractor's injured employee, could expect to "benefit" from Hunt's contract with the Project Owner or claim the contract obligated Hunt to assure their safety.

(d) Hunt's contract provided that Hunt was not "assuming the safety obligations and responsibilities of the individual Contractors," and that Hunt was not to have "control over or charge of or be responsible for...safety precautions and programs in connection with the Work of each of the Contractors, since these are the Contractor's responsibilities." In addition, it said that the construction contractor was the "controlling employer responsible for its own safety programs and precautions," and Hunt's responsibility to review, monitor, and coordinate those programs did "not extend to direct control over or charge of the acts or omissions of the Contractors, Subcontractors, their agents or employees or any other persons performing portions of the Work and not directly employed by Hunt." This proved that Hunt was not vicariously liable for a subcontractor's negligence in executing its own safety precautions.

Given the above contract provisions which help construction managers to avoid contractually assuming responsibility for job-site safety, consider one related reminder about avoiding liability as a result of actions. Remember how construction managers can become liable when they voluntarily perform safety obligations beyond what they previously agreed to in the construction management contract? For this reason, one last contract provision which would benefit construction managers could require that, if the project owner demands that construction manager begin to perform additional safety obligations, such new obligations would first be incorporated into the original contract via an amendment. This would serve as a contractual way to manage the risk of that other means of incurring liability - the construction manager's actions.

Now, here are some examples of what a construction manager seeking to avoid liability should not include in a construction management contract:

(a) Provisions by which the construction manager accepts the "duty to maintain safety on the project."

(b) Provisions providing that the construction manager is responsible for the contractors' compliance with state and federal regulations. A provision like that could show that the construction manager was undertaking legal oversight of the subcontractors. As recounted in point (d) above, construction managers can safely contract to review, monitor, and coordinate safety programs and precautions, but not to be responsible for those programs as the "controlling employer." The important inquiry is whether the construction manager has agreed to ensure contractors' compliance with the law or whether the construction manager has only agreed to monitor contractors' compliance for the project owner.

(c) Language such as: the construction manager "shall take reasonable precautions for safety of...employees on the Work."

(d) Language such as: The construction manager "shall take all necessary precautions for the safety of employees on the work."

(e) Language such as: The construction manager "shall take all necessary precautions for the safety of all employees on the project."

Ultimately, the Indiana Supreme Court held that even though Hunt had agreed to some safety-related responsibilities in the original contract, those responsibilities didn't invoke "vicarious liability." In doing so, the court chose to further the policy of providing "a way of promoting safety without exposing contract managers to suits like this one," rather than encourage construction managers to avoid taking on any responsibility for promoting job-site safety for fear of incurring liability.

Continue reading "Construction Manager Liability: Part three" »

July 18, 2012

Construction Manager Liability: Part two

iStock_000016437727XSmall.jpg
As discussed in my last post, general contractors and construction managers have very different roles in a construction project. General contractors are sometimes sued when their subcontractor's employees are injured on the job, but that's not as often the case for construction managers. In addition, the liability analysis is quite different for construction managers because, unlike general contractors, construction managers do not have overall responsibility to perform the construction and they generally only contract with project owners, not with other subcontractors. A recent Indiana Supreme Court opinion, ("Hunt Construction Group, Inc. v. Garrett") ("Hunt")sheds light on the analysis of construction manager liability.

The opinion concluded litigation which had arisen out an accident which occurred during the construction of the Lucas Oil Stadium. In Hunt, a subcontractor's employee was injured and subsequently sued the construction manager ("Hunt"). The Hunt court based its analysis on Plan-Tec, Inc. v. Wiggins ("Plan-Tec"), the first reported case in Indiana where the employee of a subcontractor sued a construction manager. Indiana courts use Plan-Tec as a "template" to evaluate claims of negligence against construction managers for injuries suffered by subcontractors' employees, and the central test of the template specifically says that "a construction manager owes a legal duty of care for job-site employee safety in two circumstances: (1) when such a duty is imposed upon the construction manager by a contract to which it is a party, or (2) when the construction manager assumes such a duty, either gratuitously or voluntarily.'" Thus, a court will determine whether a construction manager is liable for the employee's injury based on the construction manager's contracts and actions, and only one of these is necessary to prove liability.

Three things in Plan-Tec led the court to find no contractual liability for the construction manager: (1) The construction manager's contract did not specify that the construction manager had any safety responsibilities, (2) the subcontractor's contracts clearly indicated they had responsibility for project safety and the safety of their employees, and (3) the subcontractor's contracts expressly disclaimed that the construction manager had any direct or indirect responsibility for project safety.

Unlike in Plan-Tec, in Hunt, the construction manager's contract did impose some general safety-related responsibilities on the construction manager. For example, Hunt was responsible for approving contractors' safety programs, monitoring compliance with safety regulations, performing inspections, and addressing safety violations. Hunt also had the ability to remove any employee or piece of equipment deemed unsafe. However, the court determined that none of the safety-related provisions imposed on Hunt a specific legal duty to or responsibility for the safety of all employees at the construction site. Instead, the contract included "clear language limiting [Hunt's] liability" which persuaded the court that the construction manager did not have a legal duty of care to subcontractor's employees for job-site safety. We will explore that specific contractual language which limited Hunt's liability in the next post.

But even if construction managers are not liable because of their contracts, they can still, by their actions or conduct, assume "a legal duty for job-site employee safety." In Plan-Tec, it was Plan-Tec's assuming of new supervisory duties beyond those required by the initial construction documents and after the project had already begun which raised the issue of whether it had assumed by its actions such a legal duty of care. For example, Plan-Tec took on extra responsibility by appointing a safety director, initiating weekly safety meetings, directing that certain safety precautions be taken by the subcontractors, and daily inspecting the scaffolding (which scaffolding ultimately injured the employee in that case). However, in Hunt, the court affirmed that the Plan-Tec ruling does not mean that a construction manager must avoid all such responsibilities in order to avoid liability for workplace injuries. In fact, Hunt had equally undertaken each of the previously mentioned actions taken by Plan-Tec. The difference was that, in Hunt's situation, none of these actions were beyond those required by the original construction documents, and (as discussed above) those documents limited Hunt's liability. This simple fact indicated to the court that Hunt did not by its actions assume a legal duty for the employee's safety. Because Hunt neither assumed a duty by its contracts nor its actions, Hunt prevailed.

Continue reading "Construction Manager Liability: Part two" »

July 5, 2012

Construction Manager Liability: Part one of a three-part series

Thumbnail image for iStock_000017631785XSmall.jpgWhen it comes to occupational injuries, the construction industry is among the most dangerous. According to the Bureau of Labor Statistics, in 2010 there were more fatal occupational injuries in construction than in any other private industry sector. And when a worker is injured, it sometimes leads to a lawsuit.

In most cases, the workers' compensation statue (in Indiana, Ind. Code 22-3) restricts the amount an injured worker can recover from his or her employer to the amount of workers' compensation insurance, but it does not limit the amount the worker can recover from anyone else. See Ind. Code 22-3-2-13. For example, the workers' compensation statute does not prohibit an employee of a construction subcontractor from recovering from the general contractor or a construction manager. It is not uncommon for general contractors to be sued when their subcontractor's employees are injured on the job, and there are a number of reported cases in Indiana dealing with that type of claim. However, in the recent case of Hunt Construction Group, Inc. v. Garrett, the Indiana Supreme Court had an opportunity to address the liability of a construction manager. I'll discuss that case in the next couple of postings, but first let's look more closely at the difference between a general contractor and a construction manager.

Although the roles of construction managers and general contractors are sometimes confused, they are really very different. A general contractor has the obligation to the owner of a construction project to perform the work necessary to complete the project. In most cases, of course, a general contractor does not actually do all the work but rather subcontracts at least part of the work to one or more subcontractors (for example, to an electrical subcontractor or a mechanical subcontractor). In other words, the general contractor works for the owner, and the subcontractors work for the general contractor. The owner pays the general contractor for the entire cost of the project, and the general contractor pays the subcontractors out of the amount it receives from the owner. If a subcontractor makes a mistake, the general contractor is accountable to the owner for that mistake, just as if the general contractor made the mistake itself. Naturally, managing its subcontractors is an inherent part of a general contractor's job, and the general contractor has a great deal of direct control over the subcontractors.

Sometimes, however, the owner of a project hires a construction manager to oversee the construction project and to coordinate the work of all the various contractors and subcontractors on the project. Unlike a general contractor, a construction manager is not responsible for actually building the project. The construction manager essentially acts as the owner's on-the-site representative with responsibilities such as managing the budget, the schedule, and the contract documents; sending out bid requests and receiving bid submissions; approving subcontractors when they are hired; inspecting and approving the work; and more. There may also be a general contractor with responsibility for constructing the entire project, or the owner may contract directly with companies that would otherwise be subcontractors (e.g., electrical and mechanical subcontractors) without hiring a general contractor.

Either way, the construction contractors and subcontractors do not actually work for the construction manager; instead, they work either for the general contractor or directly for the owner. The owner does not pay the entire construction price to the construction manager; the construction manager receives only a fee, and the owner pays the construction contractors and subcontractors either directly or through the general contractor, if there is one. The only authority the construction manager has to do anything related the construction is in its capacity as the owner's agent.

In Hunt Construction Group, Inc. v. Garrett ("Hunt"), an employee of a subcontractor, Baker Construction Company, was injured and sued the construction manager, Hunt, claiming that Hunt was vicariously liable for Baker's actions and that Hunt negligently breached its own duty of care for job-site safety. In the next entry, we'll see how that case came out, and in the third entry we'll look at things a construction manager can do to minimize its exposure to liability for injuries to construction workers.

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