HawaiiConstructionLaw.com

New Prompt Payment Bill Working its Way Through Hawaii's Legislature

House Bill 1969 is currently working its way through the legislature, and has made its way past three committees without major changes.  The bill, frankly, is a strange one, in that it purports to extend the prompt payment measures set forth in Hawaii's procurement code (and thus applicable to public projects), to private jobs.  Even more strangely, the bill is partially drafted as an amendment to Chapter 444, Contractor Licensing. 

Chapter 444 already contains a provision requiring that contractors pay their subcontractors within 30 days of receipt of a pay request, provided there are no bona fide disputes to payment between the contractor and the sub.  If payment is not made, the contractor is subject to interest charges at the rate of 1% per month, of 12% per annum. 

Separately, the procurement code, section 103-10.5, currently requires contractors to pay their subcontractors within 10 days of receipt of payment from public authorities, and requires public agencies to release to contractors, final payment for sums due to subcontractors who have certified their completion of their work, and either put up payment/performance bonds and/or who have allowed the statutory payment bond period to lapse and have put up  retainage bond or other collateral.  If the public agency/contractor do not pay the sub, they are subject to  penalty of 1.5% per month interest on the sumes due.  This provision is subject to additional contract requirements for final completion by and between the contractor and its sub. 

HB 1969 now seeks to expand this provision to incorporate and even extend the prompt payment provisions, by amending the Contractors License provisions of Chapter 444, and imposing similar prompt payment requirements on private owners.

If passed, expect confusion, challenges, and more questions.  First, who enforces this against private owners?  The State attorney general?  RICO?  The Contractors License Board?  The procurement statute is designed to impose duties on public entities relative to public contracting.  That is not the case with Chapter 444.  Chapter 444 is  a licensing statute designed to protect public safety.  Its rules are interpreted and enforced by the board.  Notably, the Contractors License Board has submitted testimony in opposition to the bill, noting that it is not the province of the licensing chapter to impose conditions onto private owners' contracts. 

Second, there does not appear to be any language in the present form of the bill that allows parties to contract around the statute.  Does that mean that Owners and Contractors on private projects will no longer be free to craft provisions that deviate from the final payment provisions of the statute, for example imposing a lower interest rate for late payments.  Indeed, HB 1969 does not even appear to include any protective language in the event of  bona fide dispute over payment.  Does that mean an Owner/Contractor with a genuine dispute over the subcontractor's work must pay now and fight to  recover the same sums later? 

Third, to what extent does this statute create a duty by and between the Owner and the subcontractor?  The duties and rights of construction project participants are traditionally defined by contract.  Imposing payment duties through statute begins to blur that line.

There are other questions raised by the bill.  For one thing, the bill slips in a requirement that subcontractors receive notice of a filing of notice of completion as part of the requirements for mechanics liens.  If written notice is going to be required, why do contractors have to pay for publication?  

Another gem:  the bill includes a "requirement" that owners can only contract for retention of 5%.  Again -- retention is a contract value.  Even many form contracts start out with 10%.  Requiring 5% creates a statutorily imposed contract term in private contracts. 

In short, this is a bill to watch. 

Submitted by Anna Oshiro

Senate passes $500 million dollar construction bill

A bill for $500 million in construction funding has passed the Hawaii Senate.  The bill is called the "Invest In Hawaii Act of 2012" and is designed to stimulate job growth. 

Pay If Paid Upheld in Pennsylvania Trial Court

In Pencoyd Iron Works v. Axis Constr. Services, Ltd., 2012 Phila. Ct. Com. Pl. LEXIS 23 (January 18, 2012), the trial court enforced a pay if paid clause in a subcontract, finding the subcontractor assumed the risk of nonpayment in the event the general contractor was not paid by the owner.  The language of the pay if paid clause in the subcontract was as follows:  "Payment from Owner to Contractor is a condition precedent to payment from the Contractor to the Subcontractor" -- [I]n the event that payment is not made to the Contractor from Owner for any reason -- Subcontractor shall look exclusively to the Owner for payment. . ."  Hawaii's appellate courts have not yet ruled on the enforceability of a pay if paid clause in a subcontract.  The contract language in this case is pretty strong, although it could even be made stronger by a preface noting that the subcontractor agrees to accept the risk of nonpayment in the event the contractor is not paid for the subcontractor's work.  In this case, the trial court found that because the subcontractor admitted on the stand that the contractor was not paid for its work, and the owner likewise testified, the subcontractor had no basis for complaint, either under the state's prompt payment statutes, or under an equitable claim of unjust enrichment.  

Submitted by Anna Oshiro

Huge Summary Judgment Decision on Insurance Coverage for Construction Defects

Judge Patrick Border issued a Minute Order yesterday granting summary judgment to insureds in an enormous ongoing construction defect litigation class action lawsuit.  The Minute Order, which I will attempt to include in a later post, does not identify the reasoning for the decision, but this is a big, post-Group Builders, post-legislation case that requires insurers to continue to provide their insureds with a defense in this construction litigation action.  Congratulations to counsel for the insureds -- this is a very important win.

Prior to the Group Builders decision, the world of insurance coverage in construction defect cases was grey.  Insurers claimed they had no duty to provide coverage for construction defect claims, and certainly not to pay any judgments, and insureds claimed they did.  Most stepped up to the plate and provided coverage for defense, and often contributed to settlements, but at a hugely discounted rate since they were simultaneously denying the duty to to provide any such coverage.  The Group Builders decision has forced the question of coverage for construction defects to the forefront of the industry, and at some time or other, the axe is going to fall.  One way or another this matter will be addressed by the Hawaii Supreme Court.  

Submitted by Anna Oshiro

Building Code Council Bill Voted Down

The Hawaii State Senate defeated a bill its opponents said would have effectively removed the state from active involvement in building design and construction standards.

The Senate voted down Senate Bill 2692, which would abolish the State Building Code Council, and provide for a transition from the current to the new proposed law, and requires the counties to adopt building codes with their revisions or opt out of adoption.

Current Hawaiian law permits counties to make some modifications to the Hawaii State Building Code, but there are both substantive and procedural safeguards in place to avoid inappropriate amendments and maintain an appropriate degree of uniformity, the Insurance Institute for Business & Home Safety, which opposed the bill, stated.

Submitted by Anna Oshiro

New ICA Case on Economic Loss Doctrine

The ICA issued an opinion today affirming summary judgment in favor of a designer's motion for summary judgment on the grounds that professional negligence claims were barred by the economic loss doctrine.  In the case, a building owner contracted with a general contractor to install a thermal eneregy system.  The general contractor subcontracted mechanical engineering work to Dorvin Leis, which in turn subcontracted the system design to defendant/appellee Silversword Engineering, Inc. ("Silversword").   Silversword subcontracted its design work to Morikawa and C. Don Manuel. 

Appellants, the Leis Family Partnership, filed suit against Silversword and it subcontractors.   Without alleging negligent misrepresentation regarding the qualities or capabilities of the system, Appellants made claims for professional negligence against the designers.  The designers sought summary judgment, arguing that the economic loss doctrine barred Appellant's claims for professional negligence.  The trial court agreed and granted summary judgment.

On appeal, Appellants argued that the economic loss doctrine, as adopted in Hawaii, only precludes tort actions for negligence when the parties are in privity in contract.  Since the Appellant and the defendant designers were not in privity of contract, the Appellant retained its tort claims and summary judgment was improper.  Appellant also argued the trial court incorrectly failed to apply the "deviation-from-industry-standard" exception to the economic loss doctrine.

Appellant's non-privity tort claim arises from a Hawaii Supreme Court decision which enforced the economic loss doctrine by and between an owner and its contractee/designer.   In City Express v. Express Partners, 959 P.2d 836 (1998), the Hawaii Supreme Court furthered its prior adoption of the economic loss doctrine regarding damages to products themselves in the stadium rust case (State ex rel. Bronster v. U.S. Steel Corp.), by applying it to claims made against an architect by the project owner who contracted with the architect.  In City Express the Supreme Court ruled as follows:  "[i]n the context of construction litigation, where a party is in privity of contract with a design professional, economic loss damages are limited to contractual remedies, and a negligence action may not be maintained."  959 P.2d. at 839. 

Based upon this language, the Appellant in the present case argued that as it was not in privity with its designers, they were subject to liability in tort.  The ICA disagreed.  The ICA held that the City Express case only noted the non-privity nature of the parties because that was the facts of the case before the court.  The ICA noted that in a later case the Supreme Court applied the economic loss doctrine in all construction cases, even in the absence of privity of contract, so long as allowing such recovery would blur the distinction between contract and tort law.

The ICA accordingly held that in the present case, because allowing a negligence claim to proceed would blur the distinction between contract and tort law, the economic loss doctrine applied and the claim was barred.  The claims made against the designers arose out of the owner's deliberate choice not to contract with the design professionals but with a general contractor instead. 

The ICA also rejected the deviation from industry standards argument, holding that because a duty to conform to industry standards would run parallel to any contract, the design professional would constantly be subject to litigation.

The ICA decision addresses (for now) a lingering confusion left after the City Express decision which separated Hawaii's economic loss doctrine application from that of other states.  In City Express  the Hawaii Supreme Court noted that having elected to dispose of their rights and reponsibilities through contract, the courts should not upset the parties' agreements by imposing tort duties separate from those for which they contracted.  Otherwise, this might upset the construction industry as a whole -- an industry formed by the contracts of the parties acting within it.  In other states, however, the courts have taken a line much more similar to that of the ICA's today -- having chosen not to contract with the party, the complainant should not be able to make a claim in tort when it had the opportunity, and declined, to contract for allocation of rights and responsibilities.  Because the construction industry is comprised of contractors who define their rights by their agreements, it would be an upset to the industry to allow an end-run around those agreements by allowing a direct claim in tort.  Same result, very different theory.  The ICA's decision closes the logic gap between the two and forecloses the argument that really did appear to be suggested by City Express, i.e. if you are in privity, you cannot make a tort claim, but if you are not, you can. 

Submitted by Anna Oshiro

UHERO Forecast: Construction Sector Still Forthcoming

On February 10 , UHERO issued its forecast for the first quarter of 2012.  The forecast was mixed, noting a disappointing 2011 and the lingering failure of Hawaii's construction sector to bounce back from the recession.  This is some of what the report had to say about construction: 

"In the construction sector, it is necessary to talk separately about conditions on Oahu and on the Neighbor Islands.  On Oahu, employment bottomed out in mid-2010, and there has been a net gain of about 1,500 jobs since then.  Neighbor Island construction continues to slide, with no sign of a slackening in the pace of contraction. The more forward-looking data on permits shows encouraging signs of stabilization, with statewide private permits down less than 3% in the third quarter. We will have much more to say about conditions and prospects for the industry in our forthcoming “Hawaii Construction Forecast.”

 UHERO notes weakness in the public sector, including continued delays in the rail project. 

 

 

 

President's Budget Includes $250 Million for Rail Construction

PBN reports that President Obama's budget requests $250 million dollars for the Honolulu rail transit project -- $100 million more than any other rail project in the country.  This information comes on the heels of a new Hawaii News Now/Star Bulletin poll that reflects public support for the rail project has declined into negative territory. 

No Damages for Delay Clause case from North Carolina Refuses to Enforce Provision when Contract Also Contemplated "Equitable Adjustment"

In Southern Seeding Service, Inc., v. W.C. English, Inc., 2011 N.C. App. LEXIS 2432 (December 6, 2011), the North Carolina Court of Appeals reversed a trial court's determination that a "no damages for delay" clause prevented a subcontractor from claiming delay damages under a separate "equitable adjustment" clause.  The court held the trial court's blending of the two provisions did not give effect to the contract as a whole and was not in accord with the intentions of the parties. 

In the case, the construction project at issue finished 256 days beyond its scheduled completion date.  The subcontractor plaintiff notified its contractee of a right to an equitable adjustment for increased costs incurred in the form of unit price increases after a certain date.  The plaintiff filed suit seeking an equitable adjustment for increases in unit costs of labor and materials furnished for the project after a certain date.  The trial court denied plaintiff's claim, holding that the plaintiff had no contractual remedy to receive an adjustment in unit prices for delay beyond the original completion date, because the contract contained a "no damages for delay" clause providing that in the event of delay, the plaintiff was entitled only to a reasonable extension of time, but not to compensation or damages for any delay in the work.  The trial court found that increased unit prices due to delays would constitute delay damages and were contractually precluded. 

The appellate court disagreed, noting that the courts had long defined "delay damages" separately from damages for equitable adjustments.  "Delay damages" would include the cost of keeping tools and equipment on site for an extended period.  Equitable adjustments, on the other hand, allocate the risk of increased costs in the event of unforeseen circumstances, even unforseen circumstances arising out of delays.  The court of appeals noted that its courts had consistently distinquished delays damages from damages incurred for increased costs.  Thus, the trial court's failure to award equitable adjustment costs unfairly and unreasonably shifted all risks for material increases to the plaintiff, despite the language of the subcontract.  The two provisions could be satisfactorily read together, provided the traditional distinction between delay damages in the form of extended costs, vs. increased costs due to delays, was preserved.  The trial court's finding was therefore reversed.

Submitted by Anna Oshiro

Japan Times reports Deal on Relocation of Troops Stationed in Okinawa: 3300 may be sent to Hawaii

The Japan Times reports Tokyo and Washington said Wednesday they have agreed to revise a 2006 bilateral accord aimed at transferring U.S. Marines from Okinawa to Guam.  Previously, the transfer was effectively contingent upon construction of a replacement airfield by 2014.  No longer.  

The two sides say they are negotiating on moving some of the marines to Guam before the planned relocation of U.S. Marine Corps Air Station Futenma within Okinawa.  This relocation met with furious local opposition, which has stopped progress on the relocation base. 

Japan and the United States are now apparently discussing the possibility of separating the base's relocation and the return of some military facilities and land occupied by the American military in Okinawa.

The Pentagon is claimed to be considering moving about 4,700 marines and their families from Okinawa to Guam, while deploying 3,300 on a rotational basis to various locations in the Pacific, including Hawaii, Australia and the Philippines, according to sources.

An influx of 3,300 marines with their families may represent a welcome influx of necessary housing and infrastructure construction. 

Rail receives green light from Federal Transit Authority to Proceed with Advanced Construction

The City has the green light to commence with construction of the foundation and pillars that will make up the first segment of the Honolulu rail project.  The City has been authorized to spend $184.7 million on this first segment of work. 

A&B Executes Option Agreement to Purchase Development Block in Kakaako

A&B Properties, Inc., a subsidiary of Alexander & Baldwin, Inc. (A&B) announces it has executed an option agreement to purchase a development block in Kaka'ako from Kamehameha Schools, on which A&B will initiate planning for the future development of a residential condominium tower.

The property fronts Ala Moana Boulevard and is bordered by Keawe, South and Auahi streets. The site, formerly home to Comp USA, is adjacent to Kamehameha's recently announced 60,000 square-foot specialty retail and village center, and would benefit from Kamehameha's planned street-level improvements along Keawe Street. The property is entitled for high rise residential development, but may also include commercial space for businesses to serve the neighborhood. A&B expects its pre-development efforts will take several years and will not have any near-term impact on the existing tenants at the property.

Tennessee Bankruptcy Court Refuses to Discharge Debts of a Contractor Who Misrepresented his Licensing Status

The bankruptcy court for the Eastern District of Tennessee was asked to determine whether a contractor who misrepresented his licensing status should have the claims of the homeowner who believed him discharged in bankruptcy.  In In Re Heinz, 2012 Bankr. LEXIS 218 (January 18, 2012), the plaintiffs claimed that the debtor contractor fraudulently misrepresented that his construction company Masters Touch Custom Homes, Inc. was an insured and licensed general contractor in order to induce them to enter into a construction contract that left them with a fatally defective, partially constructed house.

The bankruptcy court for the Eastern District of Tennessee was asked to determine whether a contractor who misrepresented his licensing status should have the claims of the homeowner who believed him discharged in bankruptcy.  In In Re Heinz, 2012 Bankr. LEXIS 218 (January 18, 2012), the plaintiffs claimed that the debtor contractor fraudulently misrepresented that his construction company Masters Touch Custom Homes, Inc. was an insured and licensed general contractor in order to induce them to enter into a construction contract that left them with a fatally defective, partially constructed house.  

The plaintiffs' construction loan lender required a copy of the parties' construction loan contract, and received a document identifying the contractor/debtor's name, address, contractors license number, and identifying the contractor/debtor's insurance agency for workers compensation and general liability insurance.  The total construction price was for the amount of $342,700.00, and construction was scheduled to last for 12 months.  The contractor started work on the plaintiff' planned new log house residence in October 2008.  The plaintiffs, who lived at some distance from the construction site, first visited the site in July 2009, then in September 2009, and finally Thanksgiving weekend, and were increasingly dissatisfied with the rate of completion of the work.  The plaintiffs finally contacted five other builders to take over construction, all of whom opined the builder should be fired.  By this time, plaintiffs had paid their contractor a net sum of $157,420.71.  Thereafter, every builder plaintiffs contacted wanted $250,000 or more to finish the house, but plaintiffs only had $160,000 left on their construction loan.  In the meantime, plaintiffs made a number of unpleasant discoveries about their terminated contractor.  First, its general liability and workers compensation insurance was canceled for nonpayment in September 2008, and was never renewed.  Second, it was not licensed when each of the two contracts with the plaintiffs was executed.  Third, it did not identify a 2007 state tax lien as well as a number of other income tax liabilities that it was carrying when it signed the contract.  Fourth, it was never licensed in a dollar amount sufficient to build the plaintiffs' house.  It's monetary limit was $150,000.  Plaintiffs filed suit against the contractor, which responded by filing for Chapter 7 bankruptcy on November 17, 2010.

Plaintiffs' suit against its contractor was heard as an adversary proceeding in bankruptcy, in which plaintiffs asserted that the contractors' debts to plaintiffs should not be discharged in bankruptcy under the fraud exception to discharge. 

The court found the defendant debtor liable to the plaintiff in the amount paid to the contractor, of $179,420.71, plus attorneys' fees and costs.  The court further found that due to the debtor's failure to disclose and misrepresentations regarding its financial, insurance, and licensing condition at the time it signed the contract and made representations it knew would be presented to plaintiffs' construction loan lender, the debt was nondischargeable.

Submitted by Anna Oshiro