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Limit Your Liability on Construction Claims

General contractors and subcontractors are often so eager to win a bid on a project that they may sign off on a contract provided by the owner or developer that doesn’t allow for every contingency. These contracts tend to heavily favor the project and usually do not protect the contractor’s best interests.

In recent years, the rise in unpaid construction claims has skyrocketed across the United States. Most states have clearly defined statutes that provide legal remedies for contractors and subcontractors. But the nuances of the law are not as clear and often a single clause in a construction contract can mean the difference in the contractor’s ability to collect or file liens and limit liability for construction claims.

Three recent rulings on construction law cases made news across the country. As every attorney knows, looking at case studies is an invaluable tool to assist in writing contracts for their clients.

Case study 1: Multiple subcontractors vs. Corbin Park Development, Overland Park, Kansas.

The complaint: Twenty subcontractors filed suit, claiming their bills, which totaled nearly $5 million, should be paid by the general contractor or the contractor’s surety payment bond provider. A bankruptcy judge previously ruled that lenders’ claims should be satisfied before all mechanics liens. The general contractor appealed the bankruptcy court’s decision to federal court.

The verdict: The contractors argued that the pay-if-paid provisions in their contracts are unenforceable. The U.S. District Court judge rejected that argument and found that neither the general contractor nor its insurer were liable because they were not paid by the developer either. This reversed the bankruptcy court’s decision and meant all subcontractors’ bills would go unpaid.

The takeaway: Since contract laws vary from state to state, contractors need to retain a law firm experienced in the nuances of the laws and that specializes in cases of non-payment for work that already has been completed. Contractors also can turn to experienced surety lawyers who will be essential to negotiations in matters of financing, project completion, and default with project owners, creditors and financially troubled contractors during all stages of the construction process.

Case study 2: Sun City Summerlin vs. Del Webb Communities, Summerlin, Nevada

The complaint: A small group of homeowners found damage to their homes that they alleged was the developer’s faulty construction. They filed a lawsuit suing to recoup the costs needed to repair the damage caused by the flaw. The suit alleged that Del Webb’s failure to install metal weep screeds meant the stucco homes were not built to code and that the homes were not protected from water damage, which caused cracked stucco, weakened walls and mold. Nearly 1,000 homeowners later joined in, with the cost to repair each home at $50,000. The claim skyrocketed to a total of $70 million, the largest construction lawsuit ever filed in the state at that time. The lawyers representing the plaintiffs filed to get class action status to cover all 7,800 homes in the community.

The verdict: The judge rejected the class action status and awarded $4 million in damages to a mere 70 of the homeowners. The judge also found the majority of homeowners could not prove damages to their homes resulted from the absence of the weep screeds.

The takeaway: Due to the developer lawyer’s vigorous defense, the class action status was denied, which would have cost the developer millions for a mistake that only affected a small number of homes. Another key factor in the case was the statute of limitations that prevented some homeowners from filing claims that had long expired.

Case study 3: Winnebago County vs. Durrant Group Inc.

Winnebago County in Illinois filed a suit in federal court against Durrant, the architecture firm that designed the Winnebago County Criminal Justice Center, for increased expenses they claimed were caused by the firm’s bad design. The architecture firm denied that escalating costs were caused by their design, but rather that the county made changes and additions to the design that caused it to exceed the original design’s cost.

The ruling: A tentative settlement has been reached that will award the county $630,000 in recouped costs. The sum was reduced by a $60,000 counterclaim and will be awarded after the county receives cash from settlement with subcontractors of Durrant.

The takeaway: The architecture firm would have benefited from written addenda to the original contract, with detailed costs resulting in altered design to provide evidence that the county was responsible for the design changes.

Plan For All Contingencies

Hiring a law firm that is well versed in local and state laws is essential to any contractor. If retained before the contract is written, lawyers can help minimize the possibilities of risks and conflicts. When conflicts do arise, the firm can provide practical solutions for prompt resolution that protects the client’s interests.

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