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Construction Law Review

June 2009

Stimulus Update: Projects Underway With More to Follow

It has been over three months since President Obama signed into law the American Recovery and Reinvestment Act ("Recovery Act"), a $789.2 billion stimulus package intended to rescue the nation's struggling economy. With a focus on quick job creation, the Recovery Act authorized more than $460 billion in spending. Approximately $160 billion of that stimulus spending is allocated to a wide range of infrastructure projects that directly benefit the construction industry. Although the majority of Recovery Act spending will not occur until after 2009, two Recovery Act infrastructure projects are creating opportunities for private construction businesses this year. Highway Infrastructure Investment Title XII under Division A of the Recovery Act provides funding for highway infrastructure projects. Specifically, the provision adds an additional $27.5 billion in funding restoration, repair, construction, rail transportation and port infrastructure under 23 U.S.C. §§ 601(a) (8), 133(b). The funds, which remain available through 2010, are distributed to states through a formula allocation administered by the Federal Highway Administration. In order to prevent redistribution of allocated funds, states are required to obligate more than 50 percent of the Highway Infrastructure Investment funds by June 19, 2009. Contents:

Projects Underway With More to Follow State Case Updates Alabama California Minnesota Virginia Federal Case Note 1-3 4 4 5 6 7 8

Government's $50 Million Claim Against Daewoo Under Contract Disputes Act Upheld by Federal Circuit 8 Announcements 9

This advisory is published by Alston & Bird LLP to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.

The first funds under this provision were released on March 3, 2009, when $26.6 billion of Highway Infrastructure Investment funding was released to the various states. This wave immediately led to new contracts when the Maryland State Highway Administration contracted with a private company for $2.1 million to resurface Maryland Highway 650 on the same day of the funding release. Other states were quick to follow in subsequent weeks. By May 29, 2009, $14.8 billion had been obligated to more than 5,000 highway projects nationwide. As an example of how one state has taken advantage of these stimulus funds, the state of Georgia was allocated over $930 million under the Highway Infrastructure Investment provision. A large portion of these funds has been directed to areas at both extremes of population density--both the metropolitan planning organizations for large urbanized areas and areas where the population is less than 5,000--which will collectively receive $279 million. An additional $28 million is being allocated specifically to transportation enhancement projects. Finally, a general fund of $624 million has been established for highway and infrastructure projects anywhere in the state. After receiving over 2,500 funding requests for local projects, the Georgia State Transportation Board approved a list of 135 eligible projects on March 19, 2009. By May 5, 2009, Governor Perdue had certified over 100 Recovery Act funded highway investment projects totaling approximately $390 million. Bidding for the Georgia Recovery Act highway investment projects began in May, and will continue throughout the summer months. According to the Georgia Department of Transportation, additional projects will be certified through 2010. Thus far, the major certified projects in Georgia include:

PROJECT Roadway Project in Wilkinson County I-575 Resurfacing and Maintenance in Cobb County Bridge Repairs in Fulton County Intersection Improvements in Gwinnett County Sidewalk Construction in DeKalb County VALUE $47,957,367 $29,284,093 $17,454,780 $12,062,182 $2,654,400

Federal Buildings Fund Title V of the Recovery Act provides an additional $5.55 billion to the Federal Buildings Funds to convert General Service Administration facilities to high-performance green buildings and renovate land ports of entry and courthouses. Of the $5.55 billion, $750 million is being allocated to renovate and construct federal buildings and courthouses, $300 million is being allocated to renovate and construct land ports of entry and $4.5 billion is being allocated to convert federal buildings to high-performance green buildings. All funds must be obligated by September 30, 2011.

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On March 31, 2009, the General Service Administration submitted to Congress a list of projects selected to receive Recovery Act funding. The project list includes hundreds of projects in all 50 states. Pending congressional approval, the General Service Administration will spend over $6 million on green building conversion to the following five federal buildings in Georgia:

PROJECT Atlanta Richard B. Russell U.S. Courthouse Chamblee IRS Annex Athens R.C. Stephens, Jr. Federal Building Atlanta Peachtree Summit Federal Building Savannah Tornochichi Federal Building-Courthouse VALUE $2,770,000 $2,710,000 $205,000 $279,000 $243,000

Taking Advantage of the Recovery Act Through the Recovery Act, the federal government is providing an unprecedented opportunity for nearly every private company engaged in the construction industry: steady work and assured liquidity in a time of economic distress. In order to reap the benefits of over $460 billion in new federal spending, businesses must begin properly positioning themselves today--not only anticipating the compliance obligations that will be bundled with the spending, but the likely increasing challenges facing actual and potential contractors, from an uptick in protests arising out of hastily awarded contracts to increased oversight obligations to ensure spending meets anticipated goals. Federal stimulus opportunities can be monitored on www.grants.gov and www.fedbizopps.gov. State opportunities can be monitored on state recovery web pages that can be accessed at http:// www.recovery.gov/?q=content/state-local-tribal-and-territorial-resources.

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STATE CASE NOTES Alabama Material and Labor Costs Considered for Purposes of Determining Whether General Contractor's License Is Required for Construction Projects in Alabama A recent Alabama case highlights the dire risk to general contractors that are not properly licensed. In this case, the property owners entered into an oral contract with an unlicensed contractor to build an addition on their property. The unlicensed contractor stated that it was a licensed contractor. However, it did not present its license nor did it clarify that it was only licensed in the city of Florence. The owners' property was not located in Florence. The unlicensed contractor left the job incomplete at the end of July 2004. Ala. Code § 34-8-1 defined "general contractor" as someone who, for a price, undertook to construct or repair any building or structure in the state of Alabama where the cost of the undertaking was greater than $50,000. In September 2004, the unlicensed contractor sued the owners for breach of contract, alleging that it was owed $48,484 for its services. The owners counterclaimed, alleging that the unlicensed contractor had breached its contract to remodel their building and that the unlicensed contractor had misrepresented to the owners that it was licensed. The trial court awarded $30,000 to the unlicensed contractor on its breach of contract claim. On appeal, the owners argued that, under Alabama law, where any person performed work as a "general contractor" as defined by the code and failed to obtain a general contractor's license, the contract was declared null and void. The owners argued that the unlicensed contractor had engaged in the practices of a general contractor as defined by the code because the amount of the labor and supplies on the project constituted an undertaking greater than $50,000. The unlicensed contractor argued that the scope of the work did not exceed $50,000, asserting that the cost of materials should not have been included because the unlicensed contractor did not pay the suppliers directly. Essentially, the general contractor argued that, since the scope of its undertaking was less than $50,000, it had not performed work as a general contractor. Accordingly, its unlicensed status did not render the contract void. The court noted that, even though the unlicensed contractor did not pay the suppliers directly, it was in full control of the materials. Therefore, the cost of materials was included in the cost of the "undertaking." The amount for supplies in addition to the amount requested by the unlicensed contractor for its labor brought the total for the undertaking well over $50,000. As a result, the unlicensed contractor was performing the work of a general contractor within the meaning of the code. Because the unlicensed contractor was not licensed at the time it performed general contractor work for the owners, its oral contract for the construction of that project was unenforceable. Dabbs v. Four Tees, Inc., 2008 Ala. Civ. App. LEXIS 710 (Ala. Civ. App. Nov. 7, 2008)

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California No Licensing Requirement for Construction Managers on Private Projects The California Court of Appeals recently held in favor of a construction management company that was denied payment because it was not licensed as a general contractor. In The Fifth Day, LLC v. Bolotin, a construction management company sued a project owner and its principals to recover compensation allegedly owed for construction management services provided on a private project. The defendants moved for summary judgment on the grounds that the plaintiff was an unlicensed contractor and was, therefore, barred under California Business and Professions Code § 7031 from maintaining an action for compensation. The trial court granted the defendants' motion, holding that the plaintiff was a contractor, was not licensed and was, therefore, barred from bringing suit. The plaintiff appealed. On appeal, the Court of Appeals reviewed the definitions of "contractor" and "general building contractor" under Business and Professions Code §§ 7026 and 7057, as well as the plaintiff's duties under its contract with the defendants. The court determined that the plaintiff was not a contractor or a general building contractor on the project. Instead, the plaintiff was providing construction management services. The defendants argued that, even as a construction manager, the plaintiff was required to carry a license. The court, however, rejected this argument. Although the legislature provided that construction managers on public works projects must be licensed architects, engineers or general contractors pursuant to Government Code § 4525(e), it has not enacted a similar statute requiring private construction managers to be licensed. The Fifth Day, LLC v. Bolotin, 172 Cal.App.4th 939 (2009)

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Minnesota Lien for Inappropriate Costs Filed by Incompetent Employee Can Serve as Basis for Slander-of-Title Claim In a recent unpublished opinion, the Court of Appeals of Minnesota upheld a trial court's ruling that mechanic's liens erroneously filed by a construction company were published with malice sufficient to support a homeowner's slander-of-title claim. In LeMaster Const., Inc. v. Woeste, the homeowners contracted with LeMaster Construction, Inc. to remediate fire damage to their home. The lower court held that work performed by LeMaster was incompetently performed, and the homeowners eventually terminated their arrangement with LeMaster. Although LeMaster never sent the homeowners a bill for the services performed, it filed a mechanic's lien against their property in excess of $300,000 without notifying the homeowners. LeMaster later filed suit to foreclose on the lien, and the homeowners filed a counterclaim alleging, among other claims, slander of title for the malicious filing of an instrument known to be inoperative. The Court of Appeals upheld the lower court's finding that the false liens were published maliciously, as they "contained claims for sums owed to [LeMaster] for things clearly not `lienable' under Minnesota law, including claims for liquidated damages, contents handling, items that were intentionally overcharged, amounts related to fraudulent invoices from subcontractors, amounts for items that [LeMaster] purchased but expressly refused to release to the [homeowners], work that was not done at the premises and work for which [LeMaster] had already paid for and received lien waivers." LeMaster argued that the employee who completed the lien forms was trained by an attorney, and her testimony evidenced an intent to complete the lien statements accurately. However, the employee's testimony indicated that she knew nothing about what could properly be included in a mechanic's lien. The court agreed with the district court's finding that LeMaster "knowingly inflated the amounts on its invoices, and in turn knowingly employed a person with little knowledge of mechanic's liens to prepare them." The court further concluded that the record was fully sufficient to support a finding of malice, agreeing with the district court's scathing statement that "[t]he very best that can be said about these liens is that at a minimum they were sloppily and carelessly prepared without regard to the law by a marginally trained employee who by any objective standard was grossly incompetent to perform this function, and whose lack of training was or should have been known to [LeMaster's] President." LeMaster Const., Inc. v. Woeste, No. A08-0956, 2009 WL 1048194 (Minn.App. April 21, 2009)

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Virginia Public Contract Provisions that Limit a Contractor's Damages for Unreasonable Delay Void as Against Public Policy Virginia Code § 2.2-4335 provides that any provision in a public construction contract that purports to waive, release or extinguish the rights of a contractor to recover damages for unreasonable delay caused by the public body is void and unenforceable as against public policy. A provision that provides for liquidated damages for delay, however, is not void under this section. In Martin Bros. Contractors, Inc. v. Virginia Military Institute, Martin Bros. Contractors ("Martin") entered into a contract with the Virginia Military Institute (VMI) to renovate a building on campus. As a result of changes requested by VMI, the project was delayed 270 days. Martin claimed $430,242.56 in delay damages, plus the cost of recovery. VMI admitted that Martin was not at fault, but paid only $99,646.20, relying on limitation provisions in the contract that limited recovery for unreasonable delays to site direct overhead costs and excluded certain home and field office expenses. The contract also limited the allowable mark-up for overhead and profit on both additive and deductive changes in the work. VMI argued that these were liquidated damages provisions, permitted by § 2.2-4335. The Supreme Court of Virginia disagreed. The court concluded that the markup provisions addressed compensation for the owner's change orders only, and not compensation related to delay. As such, the contract provisions did not establish liquidated damages for delay and, therefore, did not fall within the exception to § 2.24335. Because VMI's contract provisions operated as an absolute bar to most of Martin's delay damages, they were void and unenforceable as against public policy under § 2.2-4335. Martin Bros. Contractors, Inc. v. Virginia Military Institute, 675 S.E.2d 183 (2009)

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FEDERAL CASE NOTE Federal Circuit Government's $50 Million Claim Against Daewoo Under Contract Disputes Act Upheld by Federal Circuit The U.S. Court of Appeals for the Federal Circuit recently rejected an appeal by the contractor Daewoo Engineering & Construction Company ("Daewoo") of an order of the Court of Federal Claims awarding the government approximately $50 million for Daewoo's violation of the Contract Disputes Act, 41 U.S.C. § 604. Daewoo had brought suit in the Court of Federal Claims against the government, alleging breach of a contract to build a road in the Republic of Palau. Daewoo's original bid amount, accepted by the government, was $88.6 million. After a series of delays, which Daewoo attributed to weather and to the government's allegedly defective specifications, Daewoo submitted a certified claim for equitable adjustment in the amount of $64 million. The trial court found that at least $50 million of the certified claim was submitted in bad faith and was fraudulent as insufficiently supported by facts or expert testimony. The trial court determined that the claim included duplicate costs, overstated equipment costs and overstated rates, and further concluded that the amount of the claim was essentially a "negotiating ploy" designed to get the government's attention. Accordingly, the trial court awarded the government $50 million under the provision of the Contract Disputes Act, 41 U.S.C. § 604, which states that "[i]f a contractor is unable to support any part of his claim and it is determined that such inability is attributable to misrepresentation of fact or fraud on the part of the contractor, he shall be liable to the Government for an amount equal to such unsupported part of the claim." Finding no error in the trial court's ruling, the Court of Appeals upheld the $50 million award. Daewoo Engineering & Constr. Co. v. United States, 557 F. 3d 1332 (Fed. Cir. 2009)

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ANNOUNCEMENTS

Atlanta-based partner John I. Spangler, III, recently made a presentation at the Seminar Group's Insurance in the Construction Industry conference held in Atlanta, Georgia, on May 8, 2009. Copies of his presentation, entitled "Who Gets the Money ­ Subrogation Rights and Construction Property Claims," are available on request. Atlanta-based partner Bill Hughes made a presentation on April 19, 2009, entitled "Contract Negotiations from the Owner's and Contractor's Perspectives." Copies of the presentation are available on request. He will make presentations regarding legal developments in the power industry at the Coal Gen Conference to be held August 19-21 at the Convention Center in Charlotte, North Carolina, and at the Power Gen Conference to be held December 8-10 at the Convention Center in Las Vegas, Nevada.

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If you would like to receive future Construction Law Reviews electronically, please forward your contact information including e-mail address to [email protected] Be sure to put "subscribe" in the subject line. If you have any questions, please contact your Alston & Bird attorney or any member of the Construction and Government Contracts Group.

ATLANTA One Atlantic Center 1201 West Peachtree Street Atlanta, GA 30309-3424 404.881.7000 CHARLOTTE Bank of America Plaza Suite 4000 101 South Tryon Street Charlotte, NC 28280-4000 704.444.1000 DALLAS Chase Tower Suite 3601 2200 Ross Avenue Dallas, TX 75201 214.922.3400 LOS ANGELES 333 South Hope Street 16th Floor Los Angeles, CA 90071-3004 213.576.1000 NEW YORK 90 Park Avenue New York, NY 10016-1387 212.210.9400 RESEARCH TRIANGLE Suite 600 3201 Beechleaf Court Raleigh, NC 27604-1062 919.862.2200 SILICON VALLEY Two Palo Alto Square Suite 400 3000 El Camino Real Palo Alto, CA 94306-2112 650.838.2000 VENTURA COUNTY Suite 215 2801 Townsgate Road Westlake Village, CA 91361 805.497.9474 WASHINGTON, D.C. The Atlantic Building 950 F Street, NW Washington, DC 20004-1404 202.756.3300

Members of Alston & Bird's Construction and Government Contracts Group

Atlanta

John I. Spangler, III Practice Group Leader 404.881.7146 [email protected] Jeffrey A. Belkin 404.881.7388 202.756.3065 [email protected] Donald G. Brown 404.881.7865 [email protected] Steven Campbell 404.881.7869 [email protected] Deborah Cazan 404.881.7667 [email protected] Daniel F. Diffley 404.881.4703 [email protected] A. McCampbell Gibson 404.881.7769 [email protected] William H. Hughes, Jr. 404.881.7273 [email protected] Thu Trinh H. Huynh 404.881.4397 [email protected] Katherine L. Miller 404.881.7947 [email protected] Julie R. Ross 404.881.7648 [email protected] Mike H. Shanlever 404.881.7619 [email protected] Aaron Vandiver 404.881.4949 [email protected]

Los Angeles

Kevin S. Collins 213.576.1184 [email protected] J. Andrew Howard 404.881.4980 [email protected] Stephanie A. Jones 213.576.1136 [email protected] Kyle A. Ostergard 213.576.1036 [email protected] G. Christian Roux Practice Group Leader 213.576.1103 [email protected] Jessica L. Sharron 213.576.1164 [email protected] Nathan D. Sinning 213.576.1134 [email protected]

Washington, D.C.

Jamil E. Nasir 202.756.3192 [email protected]

www.alston.com

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