HawaiiConstructionLaw.com

New Hawaii Law Makes General Contractor Liable for the Unpaid Wages of Subcontractors on Private Projects

SB 415 was just signed into law by Hawaii's governor, and creates risk of new liability for general contractors working on private projects in the State of Hawaii.  Here are some  answers to basic questions on the law:

1.  When does the law go into effect?  

Now.  The governor signed the bill on June 1, 2023, and it is applicable to all debts incurred from the date of the statute forward.  In other words, it is written to apply to existing projects on a go-forward basis.  

2.  Whose wages will the general contractor be responsible for?

Under the new law, general contractors will be responsible for their own employees (of course), but also their subcontractors' wages, AND also wages of sub-subcontractors..  The language of the statute refers to subcontractors "of any tier"

3.  What are "wages" and what kind of liability will the general contractor face?

Wages is just wages.  Not fringe benefits, not consequential damages, not bonuses.  The general will be responsible for wages plus interest if due.  The general can be sued for attorneys' fees and costs (including expert witness fees) but only for its own direct employees.  

4.  Who can sue?

The unpaid employees will not have a direct right of action against generals.  "A joint labor—management cooperation committee established pursuant to section 175a of the federal
Labor Management Cooperation Act of 1978 (29 U.S.C. 19 175a) may bring an action in any court of competent jurisdiction."    So it appears the unpaid worker must take up a complaint with this management cooperation committee, which must then provide notice to the contractor as a prerequisite to suit.  Other than that,  the Director of Labor and Industrial Relations may take action against the general contractor, but it does not appear the penalties of Chapter 104 will apply to such actions.

5.  How long is the general exposed?  

The entities described above have either one year from the last date an unpaid employee worked on a job to bring a claim against a general contractor, or 45 days from the filing of a notice of completion date under Hawaii's mechanics lien statutes.

6.  What can a general contractor do to protect itself?

The statute allows generals to demand effectively certified payroll from their subs and sub-subs.  Unfortunately, this is not the greatest prophylactic, because it requires the general to have to monitor payment to employees to a degree never before required on private jobs.   Also, the law specifically states that a subcontractor's failure to provide these records will not have any effect on the general contractor's liability.  Probably a combination of (1) insisting upon certified payroll; (2) monitoring workers actually onsite; and (3) maintaining retention sufficient to cover the increased risk caused by this new law, will be the best practicable response to this new law.  It would be impracticable for general contractors to seek and obtain releases from employees at every tier, especially on large projects.  The end result will probably hurt subcontractors and increase the cost of construction by increasing risk on jobs.   

Getting and Keeping a Contractors License in Hawaii

For anyone who has tried to obtain a contractors license in the State of Hawaii, you are already aware that the process can be frustrating and lengthy.   There are a number of reasons why the process can take months, and in many cases over a year, to be concluded, and this post aims to identify why that is and what you as an aspiring contractor hoping to start bidding for and performing work legally in this state, can do to try to minimize delay.  

1.  The CLB only meets once a month, and not in December.  

No matter what you have turned in for consideration, and what your exigencies may be, the contractors license board considers pending license applications once a month, and does not meet in December.   The license application committee likewise meets once a month, and after they meet, they put together recommendations for pending applications.  Some (few) are recommended for approval to move past the application stage and to the testing stage, some are denied (usually this is after a very long process of prior reviews and deferrals), and the overwhelming majority are deferred.  A deferral almost always means your application is missing some information needed for evaluation.  After the committee meeting, licensees are sent a letter informing them that their application has been recommended for deferred and why.   There is usually a list of information that is missing or questioned, such as a missing financial statement, a nonconforming financial statement, a nonconforming credit report, a missing credit report, or other missing information.  This deferral letter will not be sent out for at least a week.  This means an applicant will usually receive the letter about ten days after the application committee meeting.  If the applicant were to turn around and send the information that very day, it would still have to be re-reviewed by the application committee. 

The difficulty with this is that all paperwork received by the license office takes up to 20 business days to be processed.  So, an applicant hoping to have its license considered at the end of the month by the Board, will never be able to do so, because its license must first pass the application committee.  If it turns in missing materials for the application committee's review, the earliest possible date for such review would be the following month.  If the applicant did not receive the deferral letter in time, noting what materials are needed for further review, or if the applicant does not get the request materials in immediately, then it will likely be another month before the committee will consider the missing materials.    Because it is rare for the committee to pass any license application upon first review, and if you are an aspiring contractor and you are relying upon mail notification of the status of your license, expect to be delayed for months.

SUGGESTION:  Assign someone to the license application process, and have them follow up immediately and consistently after the committee meeting.  Most of the time when you call the number to the license board, you will get someone who dos not know the current status of your license.  I have repeatedly been told that once an application goes to the committee, the intake folks who answer the phone will not have any useful information about any missing records.  There is no phone number to reach any member of the committee.  Contractors can only email the license board, and presumably the board is inundated with emails, such that those emails can take weeks to be answered.  However, even a belated email is better than waiting for a letter to arrive in a mailbox.  If you follow up , and follow up consistently, you will save time.  Likewise, if there is anything missing from your application, if you turn that around and respond immediately, you will have a much greater advantage over the applicant who takes more time providing missing information -- every day lost is a risk that you have missed the window for reconsideration by the committee.  

2.   The CLB is extremely strict about paperwork -- any deviation will likely result in a deferral

Many applicants who apply for licenses do not read the fine print of the license application forms provided online, and find their applications denied by the license committee.  For example, the application form calls for credit reports of contractor applicants or if the applicant is an entity, the officers of the entity.  The CLB will review DCCA filings to find out who your entity is and who the officers are, and if there are missing credit reports, will defer an entire application because of that.  The CLB only wants to see credit reports from certain large credit reporting agencies.  The reports cannot be summaries.  You may have a credit score in the 800's, but if your credit report is a summary or from an unrecognized reporting agency, you will be rejected.  Likewise, the timing of the report is strict.  The report must go back at least five years, and it must show a payment history going back five years.  This means even if your credit score is in the 800's, and even if the report recounts your history for the last 10 years, the CLB wants to see a revolving credit monthly payment history to see if you ever had a late payment, for at least 3-5 years.  If you did have a late payment, the CLB may well hold up your license to ask about it.  If one officer has an unpaid utility bill that he did not know of dating back 15 years, you will either have to pay it or provide a detailed explanation about it, or your entire entity's license may well be held up.   In other words, the CLB application committee will scrutinize your credit reports for conformity and for any suggestion of  a credit issue, so applicants are advised to do so as well.  This is just the example of credit reports -- every piece of paper submitted will also be subjected to this type of review.  Any anomaly will result in a second, third, or fourth deferral, and if an applicant is simply waiting for mail notice, each deferral will result in at least a month's lost time.  

SUGGESTION:  Again, assign someone to review your submissions.  It is almost impossible to try to envision every objection the committee will have to a license application, but at least some of the obvious ones can be caught.  Many companies do not want to look at their officer's credit reports because of privacy concerns.  This may well be an issue, but the committee will.  If the report is not examined in detail,   and every issue addressed, you will have lost another month because your license will be deferred again.  This is just one example of the types of issues faced by applicants who are typically not expecting the level of scrutiny applied to each of the submissions they make.  It is also very helpful to have a local person able to walk materials to the licensing division instead of sending them by mail -- hand delivery creates accountability on both sides.  Make sure when you do so, you keep a copy of your submission (and ask it to be stamped by the license office) so that you have proof of your submission when you turn it in.  

3.  Experience requirements are hard to meet

The CLB requires 48 months of experience in the license scope you are seeking.  If you want to be a general contractor with a "B" license, you have to show that you performed or directly supervised crews performing "B" work for 48 months.   Many applicants think that they have been working in construction for years, and they have experienced contractors writing their experience certifications, so they will have no problem with this part of the application.  Then they find themselves deferred or rejected over and over again because the board does not credit their past experience towards a license.   There are a number of reasons for this.  First, 48 months means 48 months.  This means even if a job lasted for 2 years, if you only spent four months on actual construction of a structure for the protection of people or things, then you only get four months towards a "B" license.  Or if you are going for a general engineering "A" license, and the job lasted 2 years, but you were only excavating for three months, then you only get three months towards an "A".   Second, when the board says direct supervision, they mean it.    The board does not credit time spent overseeing work from a home office.  An applicant will have the best chance of getting a license if the applicant is already licensed -- either in another state or in another context, and performed work as a licensed contractor.  Other than that, the applicants who are least likely to be questioned about direct experience are foremen and superintendents.  Project engineers who have been running jobs for years, but are not licensed elsewhere and are not supervising self-performed work, routinely run into issues meeting Hawaii's experience requirements.  This is questionable reasoning, since the public is best served by having licensed contractors who not only know construction but also understand, present, and are able to work with contracts, invoices, and such, but nevertheless it is a fact of the current licensing application process.

SUGGESTION:  The grid required by the license board to show experience should accurately reflect everything an applicant has done in construction, and should be filled out to show direct supervision as well as work performed while a licensed contractor, even in another state.  The grid should reflect exact months performing types of work, and spell out that work in detail so that there can be no question that the scope of work covered by the license was included .   Applicants should look at how the board (through the administrative rules) defines the scope of each license and identify what work they have performed within that scope and for how long.  Applicants with degrees relating to their work (such as engineering degrees) should turn in proof of same so that they receive credit for their knowledge and experience in that field as well.  

The license board is charged with protecting the public from uncreditworthy or insufficiently experienced contractors.   They take that charge very seriously and as a result, the process of getting a license is often frustrating and protracted.  The addition of Covid 19 disruption to staffing and the ability to meet in person, has added to the time for review and made the process even more frustrating and lengthy.  While applicants cannot change these requirements or aid the insufficient staffing and resources available to process licenses, they can help themselves by trying to anticipate the common pitfalls of all license applications and then staying on top of their license application to minimize these delays.  

 

A Bill Awaiting Governor's Signature Will Be Bad for Procurement

Civil Beat published an article today, https://www.civilbeat.org/?p=1443162&mc_cid=4772bbfeef&mc_eid=7e39375e0a discussing a piece of legislation that has made its way to the Governor's desk and is awaiting signature.  The bill does two things.  First, it imposes a 75 day time limit for public agencies to respond to bid protests.  Second, it eliminates any cap on the cost of filing for an appeal of a bid protest decision issued by an agency.  The first part of the bill went through conference, was subject to numerous hearings and received significant public testimony.  The second did not.  The first part of the bill will effect an important reform of the procurement code to address the main complaint of participants from bidders to agencies -- delay -- while still affording agencies the ability to seek more time to address protests, if needed. 

The second part of the bill effectively eliminates oversight over agency decisions on bid protests on large projects, and will be terrible for procurement.  

Why?  There are a number of reasons the second part of the bill is bad.  First, it is a bad solution in search of a problem.  There are probably at least a thousand jobs that are issued through the public procurement process each year.   How many of these are subjected to an administrative appeal of a bid protest?  Most of the time, a handful.  The DCCA keeps an online record of every procurement decision issued as a result of an agency administrative appeal of a bid protest decision, and if you look there, you will see an average of 5-10 appeals in any given year.  One year, during the height of recession-driven competition for public works, there were 16.  The reason there are so few appeals is because they are already very expensive to do.  The cost to file a complaint in the First Circuit Court is $315.00.  The cost to file an appeal of an agency's decision on a bid protest is 1% of a bid, up to $10,000.00.  $10,000.00 is a lot of money, and most petitioners will pass on an appeal because the cost is so high and it is so difficult to win.   It is for this very reason that our office very rarely advises that clients take on appeals -- they are very expensive and hard to win.  In other words, the legislature has already put up substantial barriers to appeals, and these barriers have been working -- there are very few appeals.  So why is the legislature or the administration seeking to change the law to deal with what is in reality only a handful of appeals?  If the answer is "well we need to do something because jobs are being held up by these appeals," the answer is no, that is not true.  First, as noted above, there are not that many appeals.  Second, that is not true because everything having to do with bid protests is subject to a very strict timeframe for action.  Bidders have 5 days to file protests.  They have 7 days to file an appeal of an agency decision.  The appeal must be decided within 45 days of filing the appeal.  In other words, the statutory framework for bid protests is built around the need for speed.  Agencies are required to stay awards only during the pendency of the protest and the 45 day appeal period.   As noted, the procurement code is designed to streamline the protest process.  There is one blatant exception to existing statutory time constraints, however, and that is how long the agency is allowed to review pending protests.  By law, agencies are told they must respond to outstanding bid protests "promptly."   They have no other time deadline in which to decide a pending protest.   As a result, it is very common for public agencies to take months to decide pending bid protests.  There are jobs where protests have been outstanding for a year or more before the agency makes a decision.  A year.  Of course, if a job is going to be held up for a year, it can be understandable that there is a concern about time delays -- but these delays are not being caused by appeals of bid protest decisions.  They are happening because that is how long agencies are taking to decide bid protests.  The pending legislation addresses this by imposing a 75 day deadline for agency action, subject to extension as needed.  In other words, if the concern is delay, the first part of the bill addresses it, and there is no need for the cap removal.  And if the agency answer is "there are too many protests," then keep in mind that the removal of the appeal cap does nothing to address the number of bid protests.  All it does is remove any hope of oversight over agency decisions.  This removal of oversight will be terrible for procurement.  

The DOT job discussed in the Civil Beat article involved a client who was found to be the low responsive, responsible bidder and who was awarded a $25 million DOT job, only to have its bid challenged after award by a competitor who claimed a violation of the subcontractor listing statute.  At issue was the listing of truckers in the bid.  The DOT sided with the protestor and decided that truckers effectively are subcontractors for purposes of being required to be listed in pending construction bids.  This decision had incredibly huge implications for public procurement, and needed to be challenged in an appeal to prevent the DOT from altering procurement in a way that would effectively bring it to a halt and render every job subject to protest.  Without the ability to appeal the decision, this would have become a declared practice of the agency.   Delays would have abounded, costs would have increased, and future and existing jobs would have been thrown into question.   Yet, with the removal of the cap,  a bidder would have to have put up a $250,000 bond or pay out $250,000 in a cashier's check, to be able to even seek a review of the decision.  There is no way any bidder could afford to risk such a sum.  The decision would have been left unreviewed, and without the appeals process, the DOT's interpretation of the listing law would have been impervious to review.   This is just one job.  On projects like the Honolulu Rail project, where projects can be let for as much as $1 billion, that would mean a bidder would have to pay $10 million dollars, cash bond or cashier's check, to be able to seek review of an agency's decision.  Is it in the taxpayers' interest to have our largest jobs immune from public scrutiny because appeals have been legislated out of existence  by imposition of such hefty barriers to review?  The entire point of the procurement code is to provide an open and fair process for procurement that is not only fair in fact, but perceived as fair and open.  When agencies are allowed to respond to bid protests without any fear of review, because the cost of such review has been increased so that it is no longer tenable to pursue, contractors and more importantly, the public, lose trust in the process.  This brings us to the third and last point regarding this new legislation: a need for open debate of the issue.

Obviously, the imposition of legislation that changes the law so dramatically, in that it imposes a barrier to review that for most large projects will be insurmountable, should be the subject of substantial public debate.  That did not happen here.  As the Civil Beat article notes, the removal of the cap on the cost of filing for an administrative appeal, was a late appendage added without hearing, without new submission of testimony, and without debate.  Why?  Why is this dramatic change to the law being pushed through in the last second, rather than being subjected to  debate over whether it actually accomplishes what it is supposed to (it does not), or whether it will do more harm than alleged good?  (it does).   As Tim Lyons notes in the Civil Beat article, bid protests often arise because protestors are doing the job of the agencies -- they are seeking to compel compliance with the procurement code.  Removing the realistic capacity for review of agency decisions on bid protests takes away that policing power, and that doesn't help anyone, least of all the taxpaying public.  

 

 

Construction Coronavirus Links

The AGC has been presenting an excellent webinar series for members, covering everything from new legislation designed to protect employees, to insurance coverage questions arising out of the coronavirus pandemic, to how to physically protect your employees who are attempting to work while practicing "social distancing."  If you are an AGC member, you should sign up.  If you are not a member, now is a good time to become a member.   

I am going to try to post and keep updating these posts on construction issues relating to the outbreak and its fallout.  Rather than reinvent the wheel, I will try to provide links where possible relating to topics people are asking about, including the following:

1.  Existing Contracts Being Suspended Until Further Notice

Almost all legal blogs addressing the legal impact of coronavirus on existing projects, recommend the following courses of action:  (1) read the contract and find the relevant provisions (termination, suspension, delay, changes, force majeure), (2) ensure compliance with notice provisions in the contract; and (3) be proactive about mitigating damages, seeking relief from all sources, and working to keep your business afloat and your workers safe.  

https://www.duanemorris.com/alerts/coronavirus_construction_contracts_0320.html

https://www.jdsupra.com/legalnews/coronavirus-and-force-majeure-can-we-90661/

2.  Existing Contracts Not Being Suspended, but Being Delayed/Affected 

https://www.pecklaw.com/client_alerts/coronavirus-covid-19-guidance-for-contractors/

3.  Existing Contracts Being Terminated Due to Coronavirus

https://www.pillsburylaw.com/en/news-and-insights/scenarios-government-contractors-may-face-during-the-covid-19-national-emergency.html

4.  Contracts Being Negotiated Right Now

5.  County vs. State vs. Federal Rules on when you can/must Stay at home

6.  Employment Issues

https://clsbluesky.law.columbia.edu/2020/03/13/coronavirus-paul-weiss-discusses-employment-law-and-guidance-for-employers/

7.  Insurance:  is any of this covered by insurance?

Contractors or owners seeking to demand coverage for coronavirus related losses may be interested in following the case cited by  my partner, Tred Eyerly, who discusses what appears to be the first insurance claim brought to recover losses incurred as a result of the coronavirus outbreak.

https://www.insurancelawhawaii.com/insurance_law_hawaii/2020/03/first-suit-filed-for-losses-caused-by-covid-19.html

8.  New Legislation: can I get help for my business

The Senate passed the two trillion dollar aid package last night, and as its contents become more clear, we will pass it along. 

9.  Hawaii-specific questions

--    what cases do we have on force majeure 

--    what agencies are affected and how, for ongoing matters that need to be addressed

    (bidding, bid protests, administrative hearings, contractors license board meetings,     building permits)

 

 

 

 

Construction in the time of Coronavirus. Much is happening -- latest information is that PPE equipment shortages may hold up work even where supplies and people (and law) allow the work to continue. Will be blogging about all as days unfold.

My partners and I at the Midwinter Forum on Construction Law. Peter Hahn of the Ohio Dinsmore firm and I co-chaired the Forum's midwinter program. The topic was public construction law. We had a great time at the Millenium Biltmore hotel in downtown Los Angeles.

Midwinter 2019 Forum on Construction Law, LA, first session.

Quick post to announce the ABA Forum on Construction Law mid-winter program. To be held in Los Angeles, and the topic is public construction. I am co-chairing the program with Peter Hahn of the Dinsmore firm in Ohio. Very excited about this event! Here is a link to a "trailer" for the program, which will be held at the old site of the Academy Awards -- the Millenium Biltmore hotel.

U.S. District Court allows an unlicensed subcontractor to pursue a civil action.

In U.S. Pipelining v. Johnson Controls, which can be found online here, the court found that a an unlicensed subcontractor was allowed to bring a civil action for nonpayment against a licensed general contractor.  Hawaii's contractor licensing laws contain a strict prohibition against offering and performing work without a valid license.  Section 444-22 imposes a harsh penalty on contractors who contract for and perform construction without a license:  "The failure of any person to comply with any provision of this chapter shall prevent such person from recovering for work done, or materials or supplies furnished, or both on a contract or on the basis of reasonable value thereof, in a civil action, if such person failed to obtain a license under this chapter prior to contracting for such work."  Despite this clear language, the court in U.S. Pipelining held that an unlicensed subcontractor was entitled to bring a civil action against a general contractor, because the general and more broadly read provisions of the licensing chapter as a whole, together with certain appellate cases issuing from Hawaii courts, suggest that the provisions of the licensing code need not be interpreted and enforced so strictly.  The Court argued that appellate courts had previously allowed a licensed contractor to bring suit to collect for work for which the contractor was licensed, even though the contractor also performed work for which it lacked a proper license, and this showed flexibility in application of the law.  The Court also noted that the licensing statutes were formed for the protection of the general public, and NOT to protect industry participants such as the general contractor in this case.  

This decision is notable on a number of levels.  First, it casts doubt on a clearly written provision applicable to all unlicensed contractors.  Despite the Court's claims otherwise, there is no ambiguity in 444-22.  The subcontractor in this case was wholly unlicensed.  It was not licensed and simultaneously performing work outside of its scope.  This is the first time any court has issued a written opinion expressing its interpretation of Hawaii law in this manner.  Presumably, work performed by an unlicensed subcontractor is just as harmful to the public as work performed by an unlicensed general contractor -- ultimately the public will be the recipient of the work -- so allowing an unlicensed subcontractor to bring a civil action would not provide greater protection for the public.  Finally, the Hawaii Supreme Court has already acknowledged that section 444-22 carries harsh results:  "HRS chapter 444, providing for the licensing of contractors, expresses a very strong public policy that contractors in this state should apply for, and retrieve licenses, and the provisions of HRS 444-22, which are sweeping in their terms, are obviously intended to produce harsh results in furtherance of this policy."   Butler v. Obayashi, 71 Haw. 174, 177 (1990).  Nowhere in this case did the Court state that the scope of the provisions of  444-22, which were "sweeping in their terms," were not intended to include claims by and between subcontractor and general.   Such a ruling arguably gives unlicensed specialty subcontractors incentive to avoid the cost, expense, and inconvenience of seeking legal licensure in the State, leaving the risk and expense of those endeavors to the generals with whom they contract and from whom, now, they can apparently legally collect in civil actions.  

What Does A Trump Presidency Mean for Hawaii Contractors?

The 2016 election is over, and the country has a new President-elect.   Without getting into the chasms separating the former presidential candidates in terms of policy (and everything else), one thing both of them seem to agree upon is the need for major investments in infrastructure. For a construction lawyer, this sparks some interest.

Throughout his campaign, Donald Trump called out the need for major infrastructure investments in national roads, highways, and bridges. There is strong support for this argument. Every four years the American Society of Civil Engineers “grades” our country’s infrastructure and issues a report card on highways, parks, bridges, water, dams, and other national infrastructure systems. Our last grade was a D+, with an estimated $3.2 trillion needed to be invested before the year 2020 in order to repair and upgrade our current systems. While stock market futures plummeted the night of the election as the prospect of a Trump presidency began to take shape, Wall Street since recovered and has made surprising gains since the election. Why? Because Mr. Trump campaigned on the prospect of a one trillion dollar investment in public infrastructure. Put into context, this would be nearly ten times the $105 billion infrastructure component of the American Recovery and Reinvestment Act of 2009, and the sum alone would eclipse the $ 831 billion dollars in tax credits, health care investments, and other costs making up the entirety of the recovery act. Anticipating the possibility of investments on this scale, shares of Caterpillar stocks rose 11% in just two days following election night.

However, closer review of Mr. Trump’s infrastructure policy reveals little intent to invest public dollars anywhere near the sums cited in stump speeches. Rather, according to the policy outlined on his campaign website, Mr. Trump intends to “support investments” in infrastructure: “NAM estimates a “ten-year funding gap” of approximately $1 trillion. The Trump Infrastructure Plan is aimed at achieving a target of investment to fill this gap. NAM also found that $8 billion in infrastructure tax credits would support $226 billion in infrastructure investment over 10 years. Innovative financing programs also provide a 10-to-1 return on investment.” Translated, that appears to indicate that the Trump plan for infrastructure is to invite private developers to fund construction through offering tax credits and “innovating financing”.   Of course, private construction will require that the developer make a profit healthy enough to be an incentive to go forward, which will increase the cost of the construction and with it the new highway and bridge tolls to be imposed on current drivers – in effect, the country would be paying for infrastructure through a “flat tax” imposed on drivers who use the nation’s public infrastructure. All of this makes the future prospect of a bold new infrastructure investment somewhat murky, if not outright doubtful. However, Mr. Trump does have a supportive Congress to work with, and the democrats have already signaled an interest in working with him on infrastructure efforts. It is still possible that a compromise bill may pass which combines public private partnerships with monetary investments in infrastructure from the federal side.

What all of this means to Hawaii contractors is unclear, but based upon what has been suggested to date, it is likely that any infrastructure development arising out of the Trump “target of investment” plan will be in highly populated areas with a greater rate of return on private dollar investments. This means small communities with failing infrastructure will not be the recipient of such investments. Contractors seeking a piece of this pie here in Hawaii, where infrastructure investment is likewise badly needed, will need to start lobbying for clear public/private partnership provisions under state law (which do not currently exist), so that they can hope to participate in any public/private infrastructure proposals put forward by a Trump administration. Current Hawaii public procurement laws do not provide for private development of public roadways or infrastructure, but rather requires that construction projects be competitively let through the public procurement process.

Hawaii Supreme Court Halts Construction of the TMT: Decision here:

http://www.courts.state.hi.us/docs/opin_ord/sct/2015/December/SCAP-14-0000873.pdf

DCCA Hearings Officer rules against Nan Inc. on airport rental facility project bid protest.

This DOT project was first bid in 2014. The first three low bidders were all eliminated in favor of Hawaiian Dredging, which was slated to be awarded the bid based upon it being "low" after a reduction in job scope. Nan protested, and the DOT actually made an award of contract to Nan..

Then, the DOT apparently changed its mind again after it says new information came to light about Nan's bid being unbalanced and front loaded. Nan protested again, this time taking the protest to administrative hearing. The hearings officer issued a decision in Dredging's favor, but Nan is still considering further legal action (any legal action from now will not stop the job from moving forward). More information and analysis later.

http://www.bizjournals.com/pacific/news/2015/09/11/state-rules-for-hawaiian-dredging-in-327m-maui.html

Should Liquidated Damages Be Measured Against Actual Or Anticipated Damages? New Hawaii Fed. Case Says Both

In American Electric Co. LLC v. Parsons RCI, Inc., 2015 U.S. Dist. LEXIS
26087, the Hawaii U.S. Dist. Court was asked to rule on a summary judgment motion to eliminate a claim for liquidated damages in a construction project based upon the allegation that, in fact, the complaining party had suffered no damages and therefore, could not claim liquidated damages. 

In analyzing this argument, the court attempted to predict what Hawaii's appellate courts would say on this issue.  While it is not in dispute that under Hawaii law, liquidated damages must bear some relationship to a party's damages, the open question is which damages are to be measured -- actual damages, or anticipated damages?  In other words, if parties anticipate at the time of contracting that they will suffer great damages in the event of delayed completion, but end up suffering minimal or no damages, can they still make a liquidated damages claim? 

In the Parsons case, the contractor argued that in fact the complainant suffered no damages, because it was never itself assessed with any liquidated damages, and in fact received a bonus for completion of the job.  The complainant argued that at the time of contracting, both sides agreed and understood its damages would be great if performance was delayed, and that in fact it did receive a lesser bonus than it would have if the job was completed on time, plus it had to pay certain monies to remedy defective work in order to secure additional time for the contract and avoid its own liquidated damages liability. 

The court found under Hawaii law, it is clear that courts look to actual damages to measure against liquidated damages to determine if they are enforceable.  However, the court also found that Hawaii's courts have never stated that anticipated damages are not to be likewise used as a measure against liquidated damages and that certain cases cites by Hawaii's courts take just such an approach.  Thus, the court looked to both, ultimately finding issues of fact on both such approaches prevented a finding of summary judgment.

For drafting practitioners seeking enforcement of their liquidated damages clauses, this case emphasizes the importance of being able to demonstrate that the liquidated damages number used in the contract was actually discussed, negotiated, and agreed-upon, and not simply plucked from thin air and dropped into the agreement.   Conversely, from the Contractor's side, if you are anxious not to have to pay liquidated damages in the event no delay damages are incurred, you should definitely include such a provision in the contract's liquidated damages clause, i.e.,  "Notwithstanding the above, in no event shall any liquidated damages be sought or obtained in the event no actual damages are suffered."

Bid Protest Win: Public Job Bids Must Be Handed Over On Time or They Must Be Rejected

I recently litigated a bid protest seeking to overturn acceptance of a bid for a $7 million dollar paving job.  The time set for bid opening was 2:00.  On the date of bid opening, the low bidder ran into the room, self-stamped his bid, and handed it over to the public agency rep. behind the counter.  The bid was stamped on time, but was not received in the hands of the public agency until 1 minute after the bid deadline. 

We protested the low bid, taking the bid to the DCCA administrative hearing level.  The hearings officer ruled in our favor, finding that in order for a bid to be deemed "received" it had to be in the agency's possession and control, and if that happened after the bid deadline set forth in the invitation for bids, the bid was late. 

The hearing officer's decision is here:

Download MMB - Hearing Officer's Decision_120914

The low bidder and agency appealed their loss to the Second Circuit Court, where the original decision was upheld. 

It didn't end there, however.  The public agency still refused to award to the remaining low bidder, saying it was going to rebid the entire job rather than award to the low bidder.  We asked the Second Circuit to hold the public agency in contempt for refusing to comply with a pending court order, and on Tuesday, February 17 a notice of award letter was issued. 

Bids on public jobs often do come down to the last few minutes, due to subcontractor price changes or other variables, but it is pretty rare to see one that comes down to seconds.  Still, especially for the bidder who got his bid in on time, late is late, and the law is pretty unequivocal on the issue -- when a bid is turned in after the time identified in the invitation for bids, it will not be opened but returned to the bidder.  The big question in this protest is what "delivered" means -- does it mean self-stamping, especially a tacit practice that is not advertised as being allowed and is not used by the majority of bidders?  Or does it mean both stamping and delivery of the bid into the hands of the agency?  In this case, the hearings officer found it meant both -- which does make sense since if self-stamping alone could constitute "delivery," a bid could be deemed delivered even if it never reached the hands of the agency.  In any event, the case teaches bidders that they must have a failsafe plan for ensuring their bids get in on time. 

 

 

 

 

ICA Decision Doubles Down on Important Finding that a Contractor Assumes the Role of an Insurer If it Contracts to Defend and Indemnify

AIA contract language on indemnification typically requires contractors to hold harmless and indemnify against claims arising out of their performance of work.  Simply translated, this means if an owner is sued and ultimately it is determined that the contractor or its representatives or subcontractors were the source of the suit, the contractor must indemnify the owner for the damages it incurred as a result of being sued. 

 Painful litigation experiences have driven industry participants to routinely attempt to alter this clause to include a simple addition, that contractors must "defend," hold harmless and indemnify... and this simple addition has created a host of issues for unwitting contractees who sign off on this provision without accounting for the potential risk associated with it.  

Newest case in point:  Arthur v. State of Hawaii, et al., Nos. CAAP-13-0000531, 552, and 615 (Haw. Ct. App. February 27, 2015).  In this case, Hawaii's ICA was asked to revisit its Pancakes v. Pomare decision regarding private indemnity agreements, in which the ICA basically held that when a private contractee contracts to "defend" as part of an indemnity agreement, it takes on the role of an insurer who likewise contracts to defend insurers who are sued in civil actions. 

The Arthur case arose out of a wrongful death case in which a homeowner fell down a steep hillside and suffered a mortal head injury.  The homeowner's husband sued, claiming negligence against the State which originally owned the land, the developer who developed it, the designer who designed its improvements, the contractor who graded it, and finally the chain link fence subcontractor who, for $18,000, constructed a two foot high chain link fence at the base of the hill.  In their contracts, all of the parties had signed off on "defend and indemnify" provisions promising to defend against claims arising out of their contracts.  

At issue on appeal were various rulings at the Circuit Court level regarding the effect of these multiple indemnification and duty to defend clauses but for purposes of this post, the case boils down to three important findings.   

Pancakes Is Still The Law:  First, though specifically requested, the ICA refused to reconsider its decision in Pancakes vs. Pomare, which essentially held that when a private party contracts to defend and indemnify, it will be held to the same standards of "defense" as an insurer, meaning the duty will be determined by and enforceable upon, the allegations of the complaint, and not after trial and a determination of fault. This means that, like insurers, if there is even the possibility of a finding against the indemnitor based upon the allegations of the complaint, the indemnitor must defend against the entire complaint.  Industry consternation that private contracting parties are not the same as insurers, i.e. they do not have the capitalization, they are not likewise governed by statute, and most importantly that is not their business, apparently does not and will not sway the court from its original finding. 

Hawaii's Insurance Statute Prohibiting Indemnification for One's Own Negligence, Is Not Very Protective:  the designer in Arthur attempted to point out to the ICA that by putting indemnitors into the shoes of insurers, the court was violating HRS 431:10:222 , which provides that for construction projects, courts will not enforce indemnity agreements where one party claims indemnification for a party's sole negligence.  Focusing on the language "sole negligence," the ICA stated that the plaintiff's complaint did not allege "sole" negligence on the part of the contractor.  Therefore, the designer could not claim the indemnification clause was unenforceable under Hawaii law. 

The duty to defend is not a flow through duty unless specifically contracted to be one:   Despite finding that Pancakes is still governing law and that the duty to defend puts the indemnifier into the same shoes as an insurer who likewise contracts to defend, the ICA was unwilling to assign to the fencing subcontractor a flow through duty to the defend not just the entity with whom it contracted, but the develop and Architect as well, because of flow through provisions in the parties' contracts.  Because the Contractor contracted to defend and indemnify the Owner and because the Designers did likewise, they could not disclaim their responsibility to pay for a portion of the defense.

 

 

Okada Trucking 13 Years Later: Still Making Waves in the Industry

Last year I researched and wrote a paper on the Okada Trucking decision, first issued by the Hawaii Supreme Court in 2002.  The decision dramatically affected the scope of a general engineering and building license in the state, altering and limiting work traditionally performed by general contractors, and making them little more than construction managers for the majority of work to be performed on their projects. 

The entire paper is here:  Download OkadaTruckingAnalysis

With a number of legislative bills pending that are either attempting to use the Okada Trucking decision to further decrease the  scope of a general contractor's license, or else address Okada Trucking through elimination (or refinement) of the subcontractor listing requirements, it is appropriate to understand the case, what the law was before the case was decided, how Okada Trucking  came to be, where the case puts us in terms of other states with licensing requirements similar to Hawaii, and the effect of the case on the construction industry. 

 

Tips from the Forum on Construction Law Midwinter Meeting: Litigating the 200,000 Construction Case

Just returned from the Forum's January meeting in Scottsdale.   One of the many well attended and well done programs was a breakout session on litigating the $200,000 case,  put on by Franklin Elmore of the Elmore Goldsmith firm in South Carolina, and Erik Raines of the Hill Ward Henderson firm in Tampa Florida. 

For construction lawyers, litigating a case in which $200,000 or less is in dispute, is a difficult challenge.  Construction claims tend to be complex, involve multiple parties, and often require the assistance of experts in order to be resolved.   Even a small payment dispute between owner and contractor, or contractor and subcontractor, will often be accompanied by quality of work or delay claims that are traditionally reviewed and explained in trial by experts, and the cost of litigating a smallish fight can very easily eclipse the amount in dispute.  So, what are some tips for litigating a $200,000 (or less) construction dispute?   

1.  Define what a "win" is up front:  because of the financial constraints on a $200,000 case, and the reality that litigation to conclusion will make the case financially unfeasible, it is important to define up front what a "win" looks like when you know you will likely not take a case through trial.  Going in to a dispute with managed expectations is important for these cases -- even if the case is a slam dunk based upon the evidence, if the cost of presenting that evidence at trial eclipses the sum in dispute, that does the client no good.  So, understanding that a "win" in a $200,000 case means getting what you need (but not everything) but at a cost that still makes the endeavor worthwhile, is key.

2.  Take advantage of early mediation:  many construction contracts include pre-dispute mediation clauses requiring parties to attempt to resolve their differences in mediation before proceeding to litigation.  Often parties treat this as a perfunctory exercise but for certain cases this presents an opportunity to resolve a case early.   This requires cooperation and early preparation by counsel and a decent measure of client control/expectation management.  Also, careful selection of the mediator is important.  For personality driven disputes, it is important to find a mediator who can bridge differences.  For disputes based upon entrenched and differing views of the facts and law, it can be very helpful to find a hard working, evaluative mediator who is bright and who can offer a neutral third person's view of each sides' case.  Attorneys (and clients) must work up their cases to the extent possible before an early mediation, and go in prepared to settle.  In such cases I have settled disputes early.  Where any of these components are missing, parties can be prepared for a long dispute. 

3.  Notify carriers/invoke indemnity provisions early:  Frank Elmore pointed out at the conference that most litigants do not pay enough attention to the indemnity provisions, and use them in conjunction with other measures in the contract, to accomplish effective risk shifting.   Insurance companies can be very slow to act and make agile litigation (and resolution) difficult.  How common is it for insurers to refuse to start discussing numbers until they have seen fully fleshed out expert reports, involved every possible other insurer or subcontractor, and been advised of the likelihood of success on the merits after months of costly depositions?   This may be well and good for the multi million dollar defect case, but what about one that is for $200,000 or less?  For attorneys who have the good fortune to work with experienced adjustors who understand the way that claims can escalate if allowed to fester, agile and prompt action by insurers is possible and can lend itself to quick settlements.  Claimants complaining about defects in their homes/buildings will have much less incentive to continue finding defects and escalating their claims,  if they have reached a settlement with the only likely source of funds in a construction defect dispute.  Understanding this, it is always in the best interests of the defendant and insurer to try to work a resolution to a case sooner rather than later, even if every fact is not known, because in defect cases, chances are that the cost of the claim is only going to go in one direction.

4.  Technology advances:  Elmore and Hicks stressed the importance of using the technological advances that are available for litigants, such as predictive coding for document review.  This is at bottom software that enables a computer to weed out documents that are key to a case instead of requiring manual review of each page by an attorney or paralegal.   The upfront cost of such software makes its something that will have to be planned for by firms up front and not attributed to a single smallish case, but for those firms that have it and are able to effectively use it, they will have a competitive edge both in marketing themselves and litigating such cases.

Huge Changes to Hawaii Contractor Licensing Before 2014 Legislators

In the 2013 legislative session, the senate passed Senate Concurrent Resolution No. 84, Senate Draft 1 (2013) ("Resolution"), which requested that the Contractors License Board ("Board") conduct an assessment of each of the contractor licensing classifications under chapter 444, Hawaii Revised Statutes ("HRS"), and chapter 77, Hawaii Administrative Rules ("HAR"), and prepare a report that evaluates each classification.

The board completed its task near the end of last year and issued a report to the legislature that is currently pending, which recommends wholesale changes to the scope of work to be performed by licensed contractors in the State of Hawaii.  The report, which has been filed with the Legislative Reference Bureau, is available here. 

For general contractors, the board recommends separation into two categories -- residential and commercial.  Residential general contractors will now be able to perform the scope of work they were artificially deprived of through the Supreme Court's Okada Trucking decision, but will be limited to construction of a single one to two story residence.  Commercial general contractors will be limited to the same limited specialty licenses recognized by the Supreme Court in Okada Trucking, but will automatically be awarded the residential general contractor license.  As the board aptly put it, before Okada Trucking, a general contractor could construct a house and paint it.  After Okada Trucking, the general contractor was forced to hire a painting subcontractor to paint the house.  This new classification will once again allow the general contractor to paint the hosue.  However, it cannot go over 2 stories, and the contractor cannot contract with the same owner for more than one house. 

These legal gyrations were necessitated by the court's decision, which had the dual effect of artificially limiting the scope of a general contractor's ability to self perform work in a manner that was at odds with industry practice that had been in place for decades, while simultaneously emboldening specialty trade representatives to seek even further restrictions in the general contractor's scope of work.  As the board's report notes, Hawaii's licensing statute was originally based upon California's licensing statute.  What the board does not go on to note is how, through one court decision, Hawaii law dramatically diverged.

Whatever may be the merits of the changes set forth in the board's report to the legislature, one thing is clear:  enforcement of said changes will be an administrative nightmare for the already strained resources of the regulated industries complaint offices.  

 

Rail has Resumed but Could Be Delayed by Court Ruling Timing

HART executive director Dan Grabauskas has warned that delay of a decision from the federal court of appeals could once again suspend construction on the rail project.  The lawsuit filed by former governor Ben Cayetano and others, is on appeal and oral arguments were heard in San Francisco in August of last year, and the court's decision is still pending.

Pacific Business News reports that HART has plans to begin spending $127 million dollars in land acquisitions this summer, but will not do so with the outcome of the appeal still unknown.  Rail construction resumed in September 2013. 

Construction role in Hawaii Economy Expected to Grow

The Star Advertiser reports that the construction industry will play a larger part in the expected healthy growth in the island economy over the next few years.  Reporting on the comments of Jack Suyderhoud at the First Hawaiian Bank business outlook forum, the Adversiter notes:  "Tourism's torrid pace will taper as the sector continues to grow, but at a more moderate pace," he said. "Construction will pick up, adding jobs."