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November/December
2003
Katz &
Stone, L.L.P. Construction
Newsletter
November/December 2003
MARYLAND
COURT DISMISSES MECHANIC’S
LIEN CLAIM
FOR FAILURE TO INCLUDE TIME
OF PERFORMANCE OF WORK IN
NOTICE OF INTENTION TO CLAIM
LIEN
Generally
speaking, statutory requirements
governing the establishment
of a mechanic’s lien
are strictly interpreted and
enforced by state courts.
The case of Gravett
v. Covenant Life Church,
No. 01430 (Md. Ct. Spec. App.
filed September 10, 2003),
demonstrates that Maryland
courts observe this general
rule of strict application.
In Gravett,
a structural steel erection
sub-subcontractor brought
suit to establish a mechanic’s
lien against a project owner’s
property. Six months into
its contract, the sub-subcontractor
had sent a statutorily-required
notice of intention to claim
a lien to the owner, alleging
that it had not been paid
by the subcontractor for whom
it had performed work on the
project. Two months later,
the sub-subcontractor sent
a second notice of intention
to claim a lien to the owner,
identical to the first except
that the outstanding balance
claimed by the sub-subcontractor
was reduced.
After the sub-subcontractor
brought suit, the owner moved
to dismiss the lien action
on the grounds that the sub-subcontractor’s
notices were defective for
failing to state the time
period during which the sub-subcontractor
performed the work on which
its claim was based, as required
by Maryland’s mechanic’s
lien statute. The trial court
granted the owner’s
motion and dismissed the sub-subcontractor’s
lien claim, and the sub-subcontractor
appealed.
On appeal, the sub-subcontractor
argued that its omission from
the notices of the time period
worked was harmless and that
the notices substantially
complied with the law. The
appellate court, however,
held that under Maryland law,
the failure of a lien notice
to specify when the work was
done is a fatal defect because
such notices are designed
to allow the owner to determine
whether the claimant has a
timely, and therefore a meritorious,
lien claim. While recognizing
that the Maryland Code endorses
a form of lien notice which
need only be substantially
followed, the appellate court
held that a notice omitting
the time of the work’s
performance is not in substantial
compliance with the Code’s
form.
The sub-subcontractor also
argued that the omission from
its notices of the time during
which it performed the work
at issue was unimportant because
the owner had actual knowledge
that the sub-subcontractor
had performed its work within
the statutorily-mandated period
of time prior to issuance
of the notices. The appellate
court, however, concluded
that the mere timing of the
notices, neither of which
stated the time the sub-subcontractor’s
work was performed, did not
ensure the owner’s actual
knowledge of the time of performance
of the work. Accordingly,
the appellate court affirmed
the trial court’s dismissal
of the sub-subcontractor’s
lien claim.
Most mechanic’s lien
laws require precise detail
in the notices and other documents
that must be filed to establish
and enforce a mechanic’s
lien. Contractors need to
ensure that all necessary
information is included in
their documents or, like the
sub-subcontractor in Gravett,
they may find their otherwise
compelling lien claim ruled
invalid.
VERBAL
NOTICE SATISFIES CONCEALED
CONDITIONS NOTICE REQUIREMENT
Construction
professionals familiar with
the American Institute of
Architects’ (“AIA”)
form agreements know that
the AIA’s General Conditions
(A201) require contractors
who discover concealed or
subsurface conditions necessitating
an adjustment to the contract
price or time to provide notice
within 21 days of discovering
such conditions. While written
notice of claims should always
be provided, a recent court
decision drew an important
distinction between the AIA
General Conditions’
concealed conditions clause
and those clauses pertaining
to other types of claims.
Although the General Conditions
specifically require written
notice of most claims, this
decision illustrates that
mere verbal notice of a differing
site conditions claim will
suffice under its terms. Robert
W. Carlstrom Co. v. German
Evangelical Lutheran St. Paul’s
Congregation of the Unaltered
Augsburg Confession at Jordan,
662 N.W.2d 168 (Minn. Ct.
App. 2003).
In 1997, a church began exploring
a roof-reconstruction project.
Prior to bidding, interested
contractors were allowed to
inspect portions of the roof.
For various reasons, the church
refused to remove attic insulation
for inspection, thus denying
access to a substantial portion
of the roof. Following a competitive
bidding process, a contractor
was awarded a contract for
the project valued at $213,900.
The contractor’s crew
began removing the old roof
and was surprised by the poor
condition of the roof’s
underlying framing. The contractor
concluded that, because of
the depth of bird-mouth cuts
in the roof’s framing
and of the roof's bizarre
blocking, additional work,
material and labor would be
required to complete the project.
The contractor contacted the
architect and verbally reported
the unusual condition of the
roof. After determining it
would need to do additional
work, the contractor also
immediately gave verbal notice
to the church of the problem.
Several days later, the contractor
verbally reported the condition
of the roof to the church's
building committee, this time
outlining the expected delays
and additional costs necessary
to correct the conditions.
Approximately three months
after the contractor’s
verbal presentation to the
committee, the contractor
submitted a "change order
request" seeking an additional
$51,680.94. This request represented
the first written documentation
submitted by the contractor
concerning the unknown condition
of the roof. The church's
architect concluded that the
condition of the roof constituted
a concealed or unknown condition
and recommended that the church
pay the additional funds.
The church refused to make
the additional payment, claiming
that the contractor was required
under the contract to submit
written notice of the concealed
or unknown conditions.
Both parties proceeded to
litigation, each alleging
breach of contract. The trial
court found that the contractor
encountered unknown conditions
materially different from
conditions commonly found
in similar buildings. The
trial court further concluded
that the contract did not
require immediate written
notice of these unknown conditions
and held that the contractor’s
verbal notices satisfied the
obligation to report these
conditions within 21 days
after discovery.
On appeal, a higher court
considered the trial court’s
decision and noted that the
clause of the AIA General
Conditions concerning claims
for concealed conditions is
distinguishable from other
clauses of the General Conditions
concerning claims for extra
cost or time. According to
the General Conditions, if
conditions are encountered
at the site which are (1)
subsurface or otherwise concealed
physical conditions, differing
materially from those indicated
in the contract, or (2) unknown
physical conditions of an
unusual nature, differing
materially from those ordinarily
found to exist and generally
recognized as inherent in
construction activities of
the character provided for
in the contract, then notice
by the observing party shall
be given to the other party
promptly before the conditions
are disturbed and in no event
later than 21 days after first
observance of the conditions.
Unlike other provisions of
the General Conditions concerning
claims, this clause does not
specifically require written
notice of a claim within 21
days of discovery. In fact,
written notice is not required
until after the architect
has investigated the site
(following the contractor’s
initial notice) and determined
whether there is a basis for
a claim. Applying the terms
of the contract literally,
the court suggested that the
unique requirements of the
concealed conditions clause
were meant to ensure that
possible design changes stemming
from concealed conditions
were quickly investigated
and addressed. Accordingly,
the appellate court agreed
with the trial court and concluded
that the contract with the
church did not require immediate
written notice of the concealed
roof condition.
When a contractor discovers
concealed or subsurface conditions
for which it intends to submit
a claim, the contractor must
ensure that notice is timely
provided in the manner required
by its contract. While it
is good practice to always
provide such notice in writing,
courts will hesitate to require
written notice when not specifically
required by the contract.
As shown in the case of Robert
W. Carlstrom Co., even
preprinted forms such as the
AIA General Conditions may
permit verbal notice, unless
modified by the parties. Familiarity
with the forms commonly employed
in your trade is the best
way to recognize and negotiate
favorable claim and disputes
clauses.
FEDERAL
COURT FINDS THAT HOME OFFICE
OVERHEAD EXPENSES MAY BE RECOVERED
EVEN IF CONTRACT PERFORMANCE
IS NEVER BEGUN
In Nicon,
Inc. v. United States,
331 F.3d 878 (Fed. Cir. 2003),
the U.S. Court of Appeals
for the Federal Circuit held
that a contractor may recover
home office overhead expenses
upon its termination for convenience
by the government even when
it had not yet begun performance
at the time of termination.
While this decision represents
welcome news for contractors
delayed prior to commencement
of performance, the court
cautioned that the Eichleay
Formula, a popular means of
calculating home office overhead
damages, is not appropriate
in such situations.
In Nicon,
the United States awarded
a remodeling contractor a
$1.4 million contract to repair
an Air Force Base dormitory
at MacDill Air Force Base
in Hillsborough County, Florida.
Three days after the award,
a disappointed bidder filed
a bid protest. The government
then notified the contractor
of the protest and instructed
it to take no further actions
as to the preparation and
forwarding of submittals.
After a 288-day delay, and
before the government issued
a notice to proceed, the government
terminated the contractor’s
contract for convenience.
Thus, in
Nicon, the contractor
never commenced performance.
In the settlement negotiations
that followed, the contractor
asserted a claim for unabsorbed
home office overhead using
a modified version of the
Eichleay formula. While the
contracting officer awarded
the contractor $184,757 for
its direct costs, related
overhead, and profit, he denied
the contractor’s $387,513
Eichleay claim for unabsorbed
home office overhead. The
contractor disputed the denial
of this portion of its claim,
but the trial court granted
summary judgment in the government’s
favor. The trial court reasoned
that, while Eichleay damages
are available when a delay
extends contract performance,
in this case, there was no
performance period to extend.
On appeal, the Federal Circuit
Court agreed that Eichleay
damages were improper because
there was no touchstone on
which to meaningfully measure
how long the delay extended
performance of the contractor’s
work. According to the appellate
court, to use Eichleay to
quantify a home office overhead
claim, a contractor must show
an owner-caused delay of uncertain
duration, that the delay extended
the contract time and that
it was standby and unable
to take on other work during
the delay. Then the burden
shifts to the owner to show
either that the contractor
could have obtained "replacement
work" during the delay
or that the contractor's inability
to obtain replacement work
was caused by a factor other
than the owner’s delay.
Here, because the contractor
had no actual "contract
billings" or "days
of performance" to use
for Eichleay purposes, it
proposed that the court both:
(1) substitute constructive
figures; and (2) assume that,
if the contractor had commenced
the work, it would have completed
the project on time. The court
found, however, that constructive
figures may not be used in
an Eichleay calculation, writing
that “[u]se of the Eichleay
formula is an extraordinary
remedy, and we have been very
reluctant to make a drastic
shift in the circumstances
under which the Eichleay formula
has been available."
Despite this, the court did
not disallow the contractor’s
claim entirely, holding that
pre-performance home office
overhead expenses may be awarded
in termination for convenience
situations provided that:
(1) a “reasonable method
of allocation” is available
under the facts; and (2) all
of the other strict requirements
for entitlement to such expenses
are met. The court held that
the Eichleay formula may not
be modified to apply to situations
in which there is no contract
performance, but stressed
that the overall purpose of
a termination for convenience
settlement is to fairly compensate
a contractor for the costs
it incurs in connection with
the terminated work. Thus,
if an owner doesn’t
issue a notice to proceed
within “a reasonable
time” after the award
of the contract, and the contract
does not set a required date
for the notice to issue, unabsorbed
home office overhead is properly
recoverable even if the contract
is terminated before contract
performance begins. The court
remanded the case to the trial
court to find a non-Eichleay
basis to compensate the contractor
for its unabsorbed home office
overhead.
As a practical matter, Nicon
supports the general principle
that, in a termination for
convenience, the law seeks
to make whole the affected
contractor, and thus an unabsorbed
home office overhead is a
valid claim if the factual
circumstances support it.
VIRGINIA
COURT INVALIDATES MULTI-MILLION
DOLLAR
CLAIM DUE TO CONTRACTOR’S
FAILURE TO GIVE TIMELY NOTICE
Most construction
contracts contain language
obligating the contractor
to submit claims for extras
or changes to the owner or
higher-tier contractors within
a certain period of time after
it incurs increased costs
or delay. In addition, many
contracts also require the
contractor to notify the owner
or higher-tier contractors
of its intention to ultimately
make such claims within a
certain period of time after
the event giving rise to the
claims. As demonstrated by
MCI Constructors v. Spotsylvania
County, 2003 Va. Cir.
LEXIS 115 (Spotsylvania County
Cir. Ct. 2003), it is critical
for contractors to understand
the precise moment when the
time period to take action
on a claim will begin to run.
Adopting an unreasonable or
unrealistic view of the triggering
event can have disastrous
consequences.
In
MCI Constructors, a
contractor was engaged by
Spotsylvania County to construct
a water treatment facility.
As work progressed, disputes
arose between the county and
the contractor, delays occurred
and extra work was required.
During the course of this
project, the contractor submitted
various change orders to the
county for approval, several
of which were rejected. Months
after the project was scheduled
to be completed, the contractor
submitted a “Request
for Equitable Adjustment”
to the County, requesting
additional payment of more
than $9 million and an eight-month
time extension for the changed
and extra work it performed.
The County disputed 93 of
the 106 claims asserted within
the Request on the grounds
that, among other things,
the contractor failed to give
timely notice of its intention
to submit such claims. In
response, the contractor brought
suit to recover on its claims.
The trial court first examined
the provisions relevant to
the timing of the contractor’s
notice. The court found that
the contract between the County
and the contractor provided
that no claim for changed
or extra work could be made
against the County unless
it was notified of the contractor’s
intention to present such
claim “within ten days
of the event, thing, or occurrence
giving rise to the alleged
claim.” Similarly, state
and local laws required the
contractor to provide written
notice of its intention to
file a claim within ten days
of the occurrence or beginning
of the work upon which the
claim was based.
The court next examined when
the “event” or
“occurrence”,
which triggered the contractor’s
duty to notify the county
of its intention to present
a claim for extra or changed
work, happened. The County
argued that the contractor
was required to notify the
County even before a dispute
arose — in effect, simultaneously
with its submission of a proposed
change order in response to
a request or directive in
the field. The contractor
took an opposite view, arguing
that it was entitled to wait
until a full-fledged dispute
had arisen, and it was able
to precisely determine the
monetary impact of the extra
or change, before having to
provide notice of its intention
to submit a claim. The court
rejected both arguments, instead
concluding that, as to each
claim, the triggering event
for the notice requirement
was the contractor’s
learning that its proposed
change order, or other request
for adjustment of contract
terms, was denied, disallowed,
or disapproved, in whole or
in part, by the County. Applying
such standard, the court concluded
that the contractor did not
give the County timely notice
of its intent to submit all
93 disputed claims, and thus
held that those claims were
barred.
Contractors should always
be careful to comply with
all notice requirements in
their contracts. In order
to do so, contractors need
to have (1) a firm grasp on
the time period(s) in which
they must take action to preserve
their claim and (2) a good
understanding of the point
of which those periods will
begin to run.
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