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January 2000 Newsletters
Katz & Stone, L.L.P. Construction Newsletter
January/February 2000
Volume X, Number I
OSHA STANDARDS HELD APPLICABLE
TO CONSTRUCTION PROFESSIONALS
To satisfy its congressionally-mandated goal of improving work-place
safety, the Occupational Safety and Health Administration ("OSHA")
requires each employer to "furnish to each of his employees" a
place of employment which [is] free from recognized hazards that
are causing or likely to cause death or serious physical harm
to his employees." In furtherance of this goal, the Secretary
of Labor (hereinafter "the Secretary") has established industry-specific
standards that apply to all employers engaged in construction
work." In CH2M Hill, Inc. v. Alexis Herman, et al,
192 F.3d 711 (7th Cir. 1999), a Federal court of appeals considered
an engineer's claim that design professionals (such as architects,
construction managers and engineers) did not engage in actual
construction work and were not subject to the construction workplace
standards.
The dispute in CH2M Hill, Inc. derived from a methane
explosion that killed three workers during the construction of
sewer tunnels in Milwaukee, Wisconsin ("the City").
After reviewing the circumstances surrounding the explosion, the
Secretary issued an OSHA citation to the general contractor on
the project and the firm that the City had hired as a consulting
engineer, CH2M Hill, Inc. (hereinafter "the Engineer").
Specifically, the Secretary alleged that the Engineer had willfully
violated construction safety standards by allowing the general
contractor to use unapproved electrical equipment in the sewer
tunnels. In response, the Engineer contended that the construction
workplace safety standards allegedly violated did not apply, as
it was a professional firm not "engaged in construction work."
The court began its inquiry by focusing upon the terms "engaged
in construction." Recognizing that Congress intended OSHA
to have a broad reach, the court rejected the Engineer's attempt
to exclude all construction professionals from the construction
specific regulations and held that such regulations were applicable
to all employers "engaged in construction work," including
architects, engineers, and construction managers.
However, the court noted the distinction between employers that
perform no physical labor, such as the engineer, and the traditional
construction trades and stated that OSHA liability will be imposed
upon design professionals "only to the extent that such employers
[construction professionals] have actual and direct responsibility
for the specific working conditions at the jobsite and for any
hazards resulting from the actions of any trade contractors."
This standard has been applied by numerous courts and has been
labeled the "substantial supervision test." Recognizing
that the responsibilities of construction professionals differ
at each project, the court further stated that the imposition
of OSHA sanctions should turn upon the factual circumstances of
the design professional's responsibilities, including the language
of the applicable contract.
Based upon the "substantial supervision test," the Secretary
argued that the engineer's authority to order changes in the general
contractor's work and the engineer's perceived role in exercising
authority over safety procedures provided a basis for OSHA liability
in this instance. In contrast, the engineer argued that
its contract with the City severely limited its authority over
the safety program and required that the City be consulted on
and approve any changes to the general contractor's contract.
The court ultimately determined that the engineer did not function
as a safety coordinator, did not make representations that the
safety regulations were met, and could not instruct the general
contractor to perform or halt work. Accordingly, the Court
concluded that the record contained no significant evidence indicating
that the engineer exercised "substantial supervision" or
control over the safety program and invalidated the fines asserted
against the engineer.
The court's opinion in CH2M Hill, Inc. cannot be classified
as either a victory or a loss for design professionals.
Although the court held that design professionals can be liable
for OSHA violations, liability will not result unless the design
professional exercises "substantial supervision" over the
project's safety program. In light of the CH2M Hill,
Inc. decision, design professionals would be well-advised
to insert language in their contracts clearly delineating
the extent of their responsibility for administration of the project's
safety program.
TIGHTENING THE SCREWS ON GOVERNMENT
CONTRACTORS: FEDERAL COURT ENDORSES BROAD INTERPRETATION OF WHAT
CONDUCT CONSTITUTES A FALSE CLAIM
In recent years, the False Claims Act ("the Act") has been
interpreted by federal courts to apply to an increasingly expansive
set of conduct. By adopting a liberal definition of what
constitutes a "false or fraudulent claim" under the Act,
the recent judicial decision in the case of Harrison v. Westinghouse
Savannah River Company represents another step forward in
this general trend. 176 F.3d 776 (4th Cir. 1999).
In Harrison, the court figuratively "tightened the
screws" on government contractors, clarifying that they are now
subject to liability under the Act for conduct that once could
be arguably considered outside its reach.
Originally passed during the Civil War to curb an outbreak of
overcharges and other abuses by defense contractors, the current
version of the Act allows private litigants to bring legal action
on behalf of the government against anyone who knowingly presents
to the government a "false or fraudulent claim" for payment
or approval, or who makes a false record to get such a claim paid
or approved. In order for a contractor to be held liable
under the Act, the false or fraudulent claim must be "material,"
that is, must be capable of influencing the government to act
upon the claim. Although it has always been clear that the
submission of a false payment demand (i.e. a demand for services
not actually performed or a demand for payment of an incorrect
amount) is a "false or fraudulent claim" under the Act, until
recently, it has not been clear whether other false certifications
or representations not directly tied to a payment demand would
also be considered a false claim under the Act.
In Harrison, a federal court addressed whether Westinghouse
Savannah River Company ("Westinghouse") violated the Act
by submitting false claims to the government. Westinghouse
was a private contractor responsible for managing the operation
of a nuclear facility for the Department of Energy ("DOE").
Edwin Harrison, the plaintiff and a former vice president of one
of Westinghouse's subcontractors, alleged that Westinghouse, in
order to avoid using its own personnel, obtained DOE's approval
to subcontract a portion of its work by falsely certifying to
the government that no conflicts of interest existed between itself
and Harrison's employer. Harrison further alleged that Westinghouse
misrepresented the need for and cost of subcontracting this work
to his former employer, which resulted in the government paying
more than it would have had Westinghouse performed the task itself.
Because of the false certification and misrepresentations, Harrison
argued that Westinghouse fraudulently obtained DOE's approval
of the subcontract at issue and, therefore, that all payment demands
submitted by Westinghouse under the subcontract were "false
or fraudulent claims" under the Act. It is noteworthy that
Harrison did not contend that Westinghouse's payment demands were
themselves false. Rather, Harrison argued that the payment
demands were "false or fraudulent claims" because the payment
demands were submitted under a contract that was obtained by Westinghouse's
false and fraudulent representations to the government.
Before the trial court, Westinghouse moved to dismiss Harrison's
suit. The trial court granted the motion, flatly rejecting
Harrison's argument that Westinghouse could be liable under the
Act based on its submission of false statements to the government
to gain approval for the subcontract. Under the trial court's
interpretation, "false or fraudulent claims" could only consist
of demands for payment that are themselves false or fraudulent.
On appeal, the Court of Appeals for the Fourth Circuit rejected
the trial court's narrow interpretation of what conduct constitutes
a "false or fraudulent claim" and reversed the dismissal
of Harrison's suit. The Court held that the Act's definition
of "false or fraudulent claim" includes any payment
demand under a contract that was originally obtained by the submission
of false statements or by other fraudulent conduct. As such,
the Court clarified that when a contractor is awarded or obtains
approval of a contract by falsely certifying compliance with applicable
laws or by engaging in an otherwise fraudulent course of conduct,
all payment demands subsequently submitted by the contractor under
the contract can be considered "false or fraudulent claims"
subject to liability under the Act.
As evidenced by the Harrison decision, the Fourth Circuit
has now expanded the definition of a "false or fraudulent
claim" under the False Claims Act to include a far broader range
of conduct. In order to protect themselves from having to
defend suits brought under the Act, government contractors must
take notice of the Act's expanding applicability and of how this
expansion may impact the way they do business with the federal
government. In order to satisfy the Harrison decision,
contractors must now ensure that any and all pre-award certifications
and statements, including cost estimates and statements indicating
compliance with government standards or programs, submitted for
the purpose of obtaining a contract, are indeed truthful and accurate.
Any failure on the part of a contractor to ensure the accuracy
of pre-contract representations has the potential to result in
significant after-the-fact fines and/or litigation expenses to
the government contractor
IF YOU BUILD IT THEY WILL
SUE
Subcontractors are often required by their subcontract agreements
to list the general contractor as an "additional insured"
on their commercial insurance policies to protect the general
contractor from liability arising out of the subcontractor's work.
In Travelers Indem. Co. v. Westfield Ins. Co., 1999 U.S.
App. LEXIS 1217 (6th Cir. App.Ct, 1999), the issue before the
Sixth Circuit Court of Appeals was whether a general contractor
was an 'additional insured' under the subcontractor's insurance
policy and therefore entitled to a defense and indemnification
against a personal injury suit for injuries suffered on the job.
In Travelers Indemnity, Hoar Construction, Inc. was the
general contractor for the renovation of a Montgomery Ward store
in Southfield, Michigan. The Travelers Indemnity Company
was the general contractor's insurer. The installation of
floor coverings on the project was subcontracted to Turner Brooks,
Inc. ("subcontractor"), who was insured by the Westfield
Insurance Company ("subcontractor's insurer"). The
underlying action arose when a woodworking company employee allegedly
sustained injuries after tripping over a piece of masonite, a
floor covering material installed by the subcontractor to protect
tile during construction. The injured employee brought suit
against Montgomery Ward and the general contractor, charging that
those entities were responsible for the workplace safety hazard.
The general contractor (and its insurer) subsequently filed for
a declaratory judgment against the subcontractor and its
insurer alleging that the subcontractor's insurer was required
to defend and indemnify the general contractor in the underlying
action. The general contractor argued that such relief was
mandated by virtue of the subcontractor's role as flooring subcontractor
and the general contractor's status as "additional insured"
under the subcontractor's insurance contract.
The subcontractor's commercial insurance policy listed the general
contractor as an "additional insured," but "only with
respect to liability arising out of 'your work'" The subcontractor's
policy defined 'your work' as: (a) work or operations performed
by [subcontractor] or on [subcontractor's] behalf; and (b) materials,
parts, or equipment furnished in connection with such work or
operations.
Under the subcontract agreement, the subcontractor was required
to install carpet, vinyl base, and vinyl resilient tile flooring.
Its duties also included "using all means necessary to protect
[flooring] materials before, during and after installation" and
covering finished floors with heavy building paper to prevent
damage. However, when the project fell behind schedule
it became apparent that considerably more heavy construction
work would occur after the floor was laid than originally anticipated.
Thus, the general contractor directed the subcontractor to use
the more durable masonite panels, instead of paper, to protect
the floor.
In the underlying action, the injured employee alleged that the
masonite caused his injuries. However, the subcontractor's
insurer argued that once the flooring had been installed, the
clause mandating the use of heavy paper to protect the flooring
defined the subcontractor's responsibilities rather than the requirement
that it "use all means necessary "to protect the finished
flooring. Under this reasoning, the masonite panels (which
caused the injury) did not "arise out of," but were merely
incidental to, the subcontractor's work. As a result, the
subcontractor's insurer argued that it was not obligated to defend
or indemnify the general contractor. Both the district court
and Sixth Circuit Court of Appeals disagreed.
The Sixth Circuit discounted the argument that the subcontractor's
duty to protect the flooring by "all means necessary" ended
after the flooring's installation. It explained that "the
most sensible reading of the two clauses is that laying heavy
paper is a required means of protecting the flooring, and that
any other method need be employed only if necessary." The
'necessity' of placing the masonite panels occurred when the subcontractor
was ordered to do so by the general contractor. As such,
the court affirmed the district court judgment which obligated
the subcontractor's insurer to defend and indemnify the general
contractor as an ,additional insured" party.
The Traveler's Indemnity decision supports the proposition
that if you install the work, it is "your work" for insurance
purposes even if the work in question deviates from your original
contract.
VIRGINIA CIRCUIT COURT
INVALIDATES MECHANIC'S LIEN DUE TO WRONGFUL INCLUSION OF $250.00
COST ITEM
A mechanic's lien provides contractors an alternative means of
collecting amounts due for labor or materials supplied for improvements
to real property. Perfection of the lien demands strict
compliance with statutory requirements. In the September/October
edition of the Construction Newsletter, we reported on a Virginia
Supreme Court decision, Carolina Builders Corp. v. Cenit Equity
Co., 257 Va. 405, 512 S.E.2d 550 (1999), in which the court
invalidated a mechanic's lien because of the materialman's failure
to comply with Virginia's 150-day rule. As a follow-up to
that case, in Reliable Contractors, Inc. v. The Oakmont Corp.,
Case. No. CH96-0084 (Caroline Cir. Ct. 1999), a Virginia Circuit
Court again invalidated a lien where the contractor violated the
statutory requirement by seeking costs incurred over 150 days
prior to the contractor's last day of work on the project.
In Reliable Contractors, the contractor last performed
construction work on March 8, 1996. The contractor then
filed a memorandum of mechanic's lien in the amount of $330,846.02.
It was later discovered the lien included a $250.00 fine issued
by the Virginia Occupation Safety and Health Department on August
8, 1995, 212 days prior to the contractor's last day of work.
In response, one of the lien defendants moved to dismiss the lien
on grounds that the contractor had violated Virginia Code Section
43-4, the 150-day rule.
This code section limits the costs that may be claimed under a
mechanic's lien by providing: "the claimant may file any
number of memoranda but no memoranda filed pursuant to this chapter
shall include sums due for labor or materials furnished more than
150 days prior to the last day on which labor was performed or
materials furnished to the job preceding the filing of such memorandum."
Applying the reasoning of the Carolina Builders case, the
court granted the defendant's motion to dismiss and invalidated
the entire lien because the contractor indeed incurred the fine
more than 150 days prior to its last day of work on the project.
This decision acknowledges that inclusion of even a de minimis
charge outside of the 150 day period can result in invalidation
of the entire lien. Prior to filing a memorandum of mechanic's
lien, contractors must carefully review every charge included
in the claim and remove any and all charges which occurred more
than 150 days prior to the contractor's last day of work.
While this effort may be tedious and difficult, in Virginia, the
consequences of failing to exercise diligence are likely to result
in invalidation of the entire lien.
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