HawaiiConstructionLaw.com

AIS Legislative Response to Supreme Court Decision: New Law Would Re-Allow AIS Studies to be Conducted in Phases

Hawaii's legislature is considering a bill response to the Hawaii Supreme Court's rail decision holding that before construction can proceed an AIS study must be conducted for the entirety of a project even when (as in the case of rail), the construction is planned to be done in phases.  

Reports of this bill imply that this would effect some kind of revolution in the way Hawaii projects are constructed, when in fact, up until the Supreme Court's decision, the law was silent on this issue and construction has been allowed with the understanding that AIS studies would be supplemented as construction necessitated.   As of April 23, 2013, the bill is still proceeding, despite heated discussion on both sides of the issue.

Hawaii Supreme Court licensing decision issued: what is "incidental and supplemental" work?

The Supreme Court issued its opinion today on the licensing matter.  Bottom line:  the court remanded the case back to the licensing board for a determination of whether the jalousie removal and installation work on the protested job at issue was “incidental and supplemental” to the renovation job as a whole, in light of the cost and extent of the work. 

Without identifying any specific amount or percentage that would be deemed excessive under the law, the court simply noted that whether something is incidental and supplemental must also include an analysis of the cost and scope of the incidental and supplemental work, mindful of the fact that based upon the court’s view of the legislative history on the issue, the incidental and supplemental exception was supposed to have been narrow and minor in scope.

Judges Kim and Tootoo dissented, stating the original findings of the board should not be disturbed and the court should not attempt to seize control over decisions rightly made by the experienced members of the board. 

Because the court did not identify any amount or extent that would be unacceptable in its eyes, the bottom line of this decision is that it leaves the question of what is “incidental and supplemental” under a C-5 license gray at best, and likely subject to continued bid protests and litigation in the future.  This also likely means more expense, which will be bad news for the construction recovery currently under way, and more delay, which will be equally bad news for the long overdue renovation and rehabilitation work needed at Hawaii's schools and other public buildings. 

 

Second Half of the Group Builders Decision Issued Today: Duty to Defend Upheld, but On Grounds Consistent with First Group Builders' Finding of No "Occurrence"

The ICA issued its decision on the duty to defend portion of the pending Group Builders appeal. 

Bottom line on the crucial issue of whether the ICA would revisit or reexamine its decision that construction defects can never be "occurrences" and therefore cannot trigger insurance coverage:

1.  The court noted its prior finding that construction defects can't be an "occurrence" triggering coverage, is not dispositive of the duty to defend question

2.  At the time the trial court found a duty to defend in the underlying case, courts were split on whether construction defects could constitute an "occurrence" and therefore, there was a  possibility of coverage.

3.  Therefore, the trial court was correct in finding a duty to defend:

http://www.courts.state.hi.us/docs/opin_ord/ica/2013/April/ica29729mop

In other words, the court's ruling does not address or analyze its prior findings on what is an "occurrence" and instead goes around them to find a duty to defend based upon the law existing at the time of the denial of coverage.  So, a fortiori, the court appears to be holding there is no defense coverage for denials issued post-Group Builders.

Tred will brief this case in greater detail at his insurance law blog.

 

Nevada Supreme Court Determines Parties Can Contract to Shorten Statute of Limitations for Construction Defect Warranty Claims

In Holcomb Condo. Homeowners' Ass'n v. Venture,  2013 Nev. LEXIS 24 (April 14, 2013), available here, the court considered the effect of an arbitration agreement made part of the purchase agreements for the condominium.  The arbitration agreement was attached to the purchase agreement, but stated that it was a part of and incorporated into the purchase agreement.  The arbitration agreement contained a clause stating that the homeowner waived its rights under Nevada's construction related statutes of limitations, and instead agreed that all claims for construction defects must be brought within two years from substantial completion of the project, regardless of when the defects were discovered.

The AOAO brought an action for construction defects outside of the two year period in the arbitration agreement, and the trial court dismissed all of the the association's claims which were couched in negligence, negligent misrepresentation, breach of warranty, etc.

On appeal the Nevada Supreme Court noted that this was the first time it was faced with the question of whether parties can contractually modify statutory limitations for bringing suit.  While determining that parties could do so, the court nevertheless reversed the trial court's decision and remanded the case for further review.

The court found that under existing Nevada law, parties can contract to shorten the time limit for claims for breach of warranty for construction defects, but this only applies to warranty claims. 

More generally, statutes of limitations can be shortened by contract but only if the limitation is reasonable, is not unconscionable and does not violate public policy.  Because the trial court did not consider these factors, the Supreme Court reversed and remanded the case for the trial court to make those determinations.

 

 

North Dakota Joins Jurisdictions Holding Inadvertent Construction Defects can Constitute an "Occurrence" and Trigger Coverage

I will leave this to Tred to expound upon at insurance law blog but wanted to note a new case from North Dakota, K & L Homes v. Am. Family Mut. Ins. Co., 2013 ND 57; 2013 N.D. LEXIS 61, April 5, 2013.  Link to the case here.  Briefly, court was asked to consider whether an inadvertent construction defect could constitute an occurrence under North Dakota insurance law.  Answering in the affirmative, the court noted

"Currently, the majority of state supreme courts who have decided the issue of  whether inadvertent faulty workmanship is an accidental "occurrence" potentially covered under the CGL policy have decided that it can be an "occurrence." 

This observation is directly at odds with  the Group Builders decision which has been a consistent source of woe and ire within the local construction industry, and has yet to be addressed by Hawaii's Supreme Court.   

 

Spoliation of Evidence case from Texas Court of Appeals

In Miner Dederick Constr. v. Gulf Chem. & Metallurgical Corp.,  2013 Tex. App. LEXIS 4589 (April 11, 2013), the Texas Court of Appeals was asked to review a trial court's consideration and rejection of a spoliation claim brought by a defendant to a construction defect action.  In the case the contractor defendant (Miner) was charged with defective construction of a containment structure expansion designed to hold hazardous materials.  The work included construction of a 140 foot expansion joint.  Post construction, the joint leaked oily substances into the neighboring property. 

Miner argued the problem was caused by defective design and refused calls to repair the property pursuant to "repair" drawings Miner argued were in fact "redesign" drawings.  Repairs proceeded without Miner, and Miner's requests to observe repairs were ignored.  As part of the repairs, Miner's work (and any ability to test the same) was buried beneath half a foot of concrete.

At trial Miner argued in response to a summary judgment motion that its ability to defend against defect claims had been prejudiced by spoliation of evidence.  The trial court rejected these arguments, but the court of appeals found that spoliation had occurred.  Finding that the buried work constituted material evidence, the court of appeals rejected Gulf's arguments that it needed to be able to repair the defective work and thus the evidence was destroyed in the normal cours eof business.  This was not correct, because at the time of the evidence destruction, Gulf was aware of the potential of a dispute with its contractor.  Moreover, the "testing" provided by Gulf's own experts was not sufficient to provide a snapshot of the work at issue.  Thus, there was spoliation, and the case was remanded to the trial court for determination of the appropriate response.

 

Lump Sum Bids Based Upon Undefined Quantities: Who Bears the Risk?

On a summary judgment motion, a U.S.D.C. court out of South Dakota addressed the question of a subcontractor who contracted for undefined quantities of work on a lump sum basis, then performed over 50% more work than the parties originally contemplated.  The case is United States ex rel. Black Hills Hydro-Turf, Inc..., 2012 U.S. Dist. LEXIS 187530 (December 19, 2012), and the court essentially held that in such a case, yes, the subcontractor would bear that burden.  However, because it was not clear from the pleadings exactly what the work consisted of, and whether any of it was outside the scope of the parties' original contract, the court denied summary judgment on the part of the defendant general contractor.

California Federal District Court Case Discusses Cumis Counsel Entitlement

In Travelers Prop. Cas. Co. of Am. v. Centex,, 2013 U.S. Dist. LEXIS 50460, April 8, 2013, a U.S.D.C. case out of California, a developer (Centex) involved in a multiple construction defect suits, filed claims against its insured, Travelers, for its failure to provide a timely defense to the claims.  Centex and Travelers filed for summary judgment on a number of issues.   Of interest is the right to counsel of choice issue, either because of Travelers' alleged delay in assuming Centex's defense, or because an alleged conflict of interest entitled Centex to Cumis counsel (counsel appointed when the insurer has a conflict with its insured).   Centex lost on both issues, with the court actually reversing a prior decision from the same court, holding it would be "manifest injustice" for Travelers to lose the right to choose defense counsel simply because of delay and since it effectively bore the risk of liability if Centex lost, unless it actually waived the right, it retained the right to appoint its own counsel. 

The court also rejected Centex's argument for Cumis counsel, finding that the insurer's proceeding with the case under a reservation of rights was insufficient to raise a conflict of interest sufficient to justify appointment of independent counsel for the insurer.

World's Largest Telescope Cleared for Construction atop Mauna Kea

Rendering of the ThirtyMeter Telescope from http://www.tmt.org/news-center/new-renderings-reveal-planned-design-tmt

California and Canadian university plans to construct the world's largest telescope, the thirty meter telescope, atop the summit of Mauna Kea, won approval from the Department of Land and Natural Resources on Friday.   The decision allows the thirty meter telescope project to negotiate a sublease with the University of Hawaii, which leases the land from the State of Hawaii. 

Construction costs for the project are estimated at $1 billion.  When constructed, the telescope will be able to monitor planets circling stars other than the sun.  More information on the project is here.

Ohio Ct. Appeals Addresses Design Liability and Measure of Damages for Construction Claims

In B&B Contrs. & Developers, Inc. v. Olsavsky Jaminet Architects, Inc.,  984 N.E.2d 419 (Ohio Ct. App. 2012), available here, the Ohio Court of Appeals affirmed in part and reversed in part a verdict in favor of a contractor against its own architect.  The contractor built an ice rink pursuant to a design build contract.  Its architectural firm subcontracted portions of the design work to various design subs.  The contractor was successfully sued by the owner because of claims the rink was moldy due to improper design.  Contractor in turn sued its architect and won based on a professional negligence claim.

Contractor appealed the trial court's refusal to award the attorneys' fees contractor had been forced to pay to the ice rink owner, holding these constituted attorneys' fees that were not awardable to contractor in a professional negligence action.  Contractor argued they were not attorneys' fees, but instead were damages since they were not the contractor's fees but instead a measure of the losses it suffered due to its architect's negligence.  The appellate court agreed, reversing the trial court's ruling on the attorneys' fees contractor paid to the owner and finding them recoverable in a negligence claim as a measure of the contractor's damages.

Contractor also appealed the earlier dismissal of its contract claim as being repetitive of the professional negligence claim.  The appellate court agreed but warned contractor if it remanded on this basis, the court would require a new trial since the claims were so intertwined.  Contractor at oral argument dropped this claim, and the appellate court did not address it to its conclusion in the decision.

Finally, the court addressed the architect's cross appeal and rejected each argument in turn, most notably architect's argument that in order to prove damages for construction claims, one must prove both diminution in value, and the cost of repair, and the lowest damage amount prevails.  The court of appeals rejected this argument, finding the diminution in value showing is no longer a requirement under Ohio law.  The design firm nevertheless argued that the elimination of the diminution in value proof requirement was only limited to commercial properties, and the court found this to be a meaningless distinction, thus officially extending the exemption to all properties. 

Nationwide construction jobs report

Information regarding national construction jobs is discussed here.  Bottom line:  construction jobs are up nationwide.  Alaska heads the list at 12% increase, Hawaii is second at 8%.

New Hawaii U.S.D.C. Insurance Case

This case  will likely be dissected at Tred's Insurance Law Blog, but wanted to mention it quickly this a.m.

In Ass'n of Apt. Owners of Imperial Plaza v. Fireman's Fund Ins. Co.,  Civ. No. 11-00758 ACK-KSC , LEXIS 50904, April 9, 2013, senior district court judge Alan Kay ruled on a summary judgment motion that Fireman's Fund owed an indemnity obligation to its insured, the AOAO of Imperial Plaza.

The case involved what was originally a three-story warehouse with a roof consisting of a cement topping slab.   An insulation layer was placed on top of the cement roof slab with the roof being placed upon the layer.  The insulation layer consisted of a
layer of cork, a layer of canec, and another layer of cork.   Canec is a
fiberboard made out of sugar cane bagasse and treated with inorganic arsenic
compounds as an anti-termite agent.   In the 1990's, a fourth floor was constructed on top of the existing third floor roof of the building.   The builders poured a concrete slab upon the entire existing roof assembly of the building before constructing the fourth floor on top of part of the new slab.  

Fourth floor slab deflections led to testing finding that moisture in the insulation layer was decomposing the canec.  Tender to the plaintiff's insurer resulted in a denial of coverage.  Later plaintiff discovered arsenic in the concrete slab of the fourth floor, after which plaintiff remediated the floor, removing and replacing the slab and insulation layer. 

In its suit, plaintiff sought indemnification from its insurer for attributable to damages caused by the arsenic discovery.  The insurer inturn argued a number of coverage defenses, including failure to re-tender when the arsenic was discovered (years after the deflection test and original tender).  Insurer also argued  no damages within the policy period, or applicability of exclusions for gradual deterioration or defective design or construction, or pollution.  Insurer argued that the design of the fourth floor construction was improper because it did not call for removal of the canec insulation level.

The court rejected each of these arguments, holding that the plaintiff had no duty to re-tender its claims to insurer, and that it provided notice with the required period since plaintiff notified the insurer shortly after the arsenic discovery.  The court likewise rejected the insurer's exclusion claims:  moisture intrusion caused by a broken water line, was independent from the alleged design error of failing to remove the canec.  Moreover, the pollution exclusion did not apply because the policy covered damage caused by contact with the pollution which was the case in the present matter. 

On Bond Claim Time Limits

The Miller Act and most of the state bond statutes mirroring the Miller Act, impose a one year statute of limitations to file a bond claim from the last date labor or materials were supplied to a project.  (There are other requirements, such as providing notice to the contractor and surety within 90 days after the last date labor or materials were supplied).

Reviewing a case this morning from Mississippi, reminds that rushing back to the project site after completion to pound a few nails, will not resuscitate  an expired claim.  The court in In re Triangle Maint. Serv., Case No. 11-15142, A.P. No. 12-01020, UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF MISSISSIPPI, 2013 Bankr. LEXIS 1407 (April 3, 2013) was asked to make this determination when a subcontractor/debtor sought to recover on a bond claim made against a general contractor claiming the subcontractor's bond action was filed 6 days too late.  According to defendant, its subcontractor's last day of work was February 11, and according to the subcontractor, its last day of work was February 18.

Both sides presented the court with evidence of the last day work was performed on the job, and the general reminded the court of the line of cases holding that remedial or corrective work does not constitute materials or labor for purposes of determining the statute of limitations for bond claims. 

But for both sides' failure to authenticate their evidence, thus ultimately mooting the issue before the court, an interesting question appeared to be forming for the court's decision:  defendant's unauthenticated evidence consisted of letters complaining of the plaintiff's failure to adequately man the job, and poor performance on the site.  Defendant apparently contested both that plaintiff showed up on February 18 as it claimed, and/or that any work provided could have been anything but remedial or corrective.    As noted, however, both sides failed to authenticate their letters and other documents and therefore summary judgment was denied since Defendant bore the burden of proof on its affirmative defense of untimeliness. 

Construction Debtor's Money Transfer to a Surety within 90 Days of Bankruptcy Deemed Subject to "New Value" Exemption

While in Hawaii it seems most insolvent subcontractors or small general contractors seem to simply disappear rather than declare bankruptcy, construction related bankruptcy cases are still helpful, since (1) insolvent parties in construction projects still do crop up; and (2) the procedural machinations of bankruptcy are unfamiliar to many construction lawyers.

Case in point:  bankruptcy laws treat asset transfers that occur within 90 days of the initiation of bankruptcy proceedings as "preferential transfers" and the trustee in bankruptcy can pull back the sums transferred into the debtor's estate.  For obvious reasons, if this law were not in effect, debtors would otherwise dump all of their assets, selectively paying off debts, before declaring bankruptcy.  There are exceptions to the rule where payments are made for preexisting debts, where the monies have been "earmarked" to pay previous debts, and/or, as in this new case, where the debtor's expenditure results in new value exceeding the value of the asset transfer.

In Campbell v. Hanover Ins. Co. (In re ESA Envtl. Specialists), 709 F.3d 388 (4th Cir.  2013), the debtor, ESA, was an environmental and industrial engineering firm that sought and performed construction projects with the federal government.  ESA had an outstanding loan with a bank that, in the waning days before ESA's Chapter 11 declaration, it added to with a 1.3 million dollar loan that ESA used to collateralize bonding on a federal Miller Act project.  The 1.3 million dollars was transferred to ESA's bond company which allowed ESA to go forward with the job.

ESA's subsequent Chapter 11 declaration became a Chapter 7 liquidation, and in those proceedings the trustee of the estate sought to recover the 1.3 deposit.  The trustee argued in bankruptcy that the deposit was a preferential transfer to the bond company.  Bond company responded the deposit was an exception to the preferential transfer rule because (1) the monies borrowed were "earmarked" to be paid over to the bond company; (2) the transfer allowed recovery of new monies (the federal job's profits) that exceeded the value of the debt; and (3) since the bond company actually had to step in and use the 1.3 million to finish the project, pay subcontractors and suppliers, equity demanded it be entitled to keep the money.

The bankruptcy court found for the bond company on the earmark exception.  On appeal, the 4th Circuit Court of Appeals disagreed with the finding, but ultimately upheld the decision, because of the "new value" exception -- since the federal project raised the prospect of profits in excess of the amount of the debt, transfer to the surety was deemed proper under the "new value" exception to the preferential transfer statute.

One other item of note:  the 4th Circuit dismissed outright the suggestion that equity could exempt a creditor from the preferential transfer rule -- the only recognized exceptions are the statutory exceptions. 

 

UH Poised To Lose Authority to Procure its Own Construction Projects

Coming on the heels of allegations over University of Hawaii procurement processes, the State Senate appears poised to pass a bill taking all construction and construction consultant services out of the hands of UH, and into the jurisdiction of the Department of Accounting and General Services (DAGS).

I was tracking this bill as it made its way through the legeislature, but lost some interest when the bill was altered to only cover consulting services, but not construction.  Well, the latest iteration of hte bill has re-inserted the language about construction contracts and so the bill could have very far reaching effect on a big player in state procurement.