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An award for consequential damages against a contractor can turn a profitable project into a potential for bankruptcy. Consider this example: In 1983 a contractor was hired as construction manager on a project to renovate an Atlantic City casino. The contract stated that the contractor would coordinate with the owner and architect, supervise the trade contractors, and set a guaranteed maximum price for the project in exchange for a fee and expenses.

Although a great deal of the project was completed on time, construction of the façade designed to attract customers passing by the casino was late. The owner terminated the contract because of the delay on the façade, and the contractor brought an action for wrongful termination and the balance of the fee. In turn, the casino sought damages for lost profits and was awarded $14,500,000 in arbitration which was later upheld by the New Jersey Supreme Court. This scenario demonstrates the impact of a consequential damage award and illustrates the importance of contractually managing these risks.

In 1997 the American Institute of Architects (AIA) revised its form contract language pertaining to consequential damages in its general conditions (AIA A201). The A201 general conditions adopted a mutual waiver of consequential damages in reaction to the decision referenced above. The pertinent section reads as follows:

“The Contractor and Owner waive all claims against each other for all consequential damages arising out of or relating to this Contract. This mutual waiver includes:
Damages incurred by the Owner for:
  • Rental expenses;
  • For losses of use, income, profit, financing, business and reputation; and
  • For loss of management or employee productivity or of the services of such persons; and
Damages incurred by the Contractor for
  • Principal office expenses including the compensation of personnel stationed there;
  • For losses of financing, business and reputation; and
  • For loss of profit except anticipated profit arising directly from the Work.”

This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination. Nothing contained in this shall be deemed to preclude an award of liquidated direct damages, when applicable, in accordance with the requirements of the Contract Documents.

On its face, this language seems to favor contractors because the largest consequential damage claims (like the one referenced above) are those recoverable by owners. Lost profits may be recoverable by contractors but typically those losses are not comparatively as large. Although it seems to favor contractors, the A201-1997 mutual waiver of consequential damages language may not eliminate owners’ options for recovering consequential damages for construction delays.

Owners may attempt to recover lost profits, loss of use or other consequential damages as liquidated damages even if the parties agree to the mutual waiver of consequential damages. The A201-1997 document uses the term “liquidated direct damages” in an attempt to remove “consequential” damages from an award for liquidated damages. The definition of “liquidated direct damages” is not included in the document and has not been addressed by the courts.

In Idaho, two requirements must be met for recovery of liquidated damages: (1) an accurate determination of the actual damages that might be incurred upon breach must be difficult or impossible to determine; and (2) the amount of the liquidated damages must bear a reasonable relationship to the actual damages anticipated to be incurred. This seems to contradict the idea of “liquidated direct damages” because eliminating consequential damages leaves only recovery for damages which should not be difficult or impossible to determine at the time the contract is entered into. However, Idaho courts have held that the fact that there is an accepted means of calculating damages does not necessarily mean that the amount of the damage will be easily determined.

Liquidated damages, although likely inclusive of consequential damages, are somewhat beneficial to contractors in that they define a limitation of risk resulting from construction delays. Contractors should discuss what types of costs a liquidated damages provision is intended to cover when negotiating contract terms with an owner and try to limit the recovery amount to direct damages.

Additionally, contractors should consider including a liquidated damage provision which applies in the case of owner-caused delays and disruptions. This way contractors may recover for those overhead, bonding capacity and onsite costs which continue to be incurred as a project is delayed. While the drastic results of an award of consequential damages have been addressed by A2011997, neither party is entirely without crafting a liquidated damage provision which attempts to address delay damages.

Contractors should consider having their legal consultant periodically review their contracts to manage their risk exposure in the contract’s liquidated damage provisions and in language pertaining to consequential damages.

(Published in the Idaho Business Review, January 2007)

With few exceptions, the Idaho Contractor Registration Act (“Act”) requires registration of anyone who engages in construction work or holds themselves out as capable of performing construction work for others. Contractors in Idaho are well aware that failure to comply with the Act has serious consequences.

The Act contains several non-criminal penalties for failure to register. Idaho Code § 54-5208 provides, in pertinent part, that “[a] contractor who is not registered as set forth in this chapter, unless otherwise exempt, shall be denied and shall be deemed to have conclusively waived any right to place a lien upon real property. . .” Additionally, under Idaho Code § 54-5217(2), a contractor, unless otherwise exempt, cannot file a lawsuit to collect “for the performance of any act or contract for which registration is required by this chapter without alleging and proving that he was a duly registered contractor. . . at all times during the performance of such act or contract.”

Although the Act has been effective since January 2006, Idaho appellate courts have only recently interpreted these provisions. A recent Idaho Supreme Court opinion, Parkwest Homes LLC v. Barnson, clarifies the Act’s penalty provisions as they relate to a contractor’s right to a mechanic’s lien.

In Barnson, the contactor, ParkWest, negotiated and executed a contract to construct a home before it registered under the Act but did not commence construction work until it was properly registered. ParkWest sought full compensation for its work by recording a claim of lien against the property and filing a lawsuit to foreclose its lien. A dispute arose regarding the validity of ParkWest’s lien. The owner argued that the lien was void because ParkWest was not registered under the Act when it entered the contract.

The Idaho Supreme Court did not find such a harsh reading of the Act persuasive. It held that the Act only denies the right to lien “for work or labor done or materials furnished in the construction during the period that the contractor is not registered.” The Court found that “to hold otherwise would mean that a contractor who violated the Act would be forever barred from obtaining a mechanic’s lien.” The Barnson decision shows that the Idaho Supreme Court will liberally construe the Act to allow recovery for the contractor. It is clear, however, that a contractor is only entitled to lien for work performed while duly registered under the Act. This raises several issues with Idaho’s lien statutes.

Idaho’s courts are currently full of priority disputes between mechanic’s lien claimants and beneficiaries under deeds of trust. The priority date for a deed of trust is the date that it was properly recorded. As contractors are well aware, the priority date for a mechanic’s lien is the date of commencement of the work.

Under the Barnson decision, the priority date for a mechanic’s lien is probably when a contractor begins work on a project as a duly registered contractor under the Act. Thus, a contractor who begins construction on a project before it registers under the Act risks losing its lien priority. Moreover, a contractor who fails to timely renew its registration may lose its lien priority on any work performed after the period in which it was unregistered. Given the deflated property values in this economic downturn, a loss in lien priority often results in no recovery for the contractor.

Another important consideration is that a mechanic’s lien is invalid unless recorded within 90 days after last performing work. The 90 day period typically starts to run when the project is substantially complete. Under Barnson, however, the 90 days will likely run from the last day the contractor performed work as a duly registered contractor under the Act. Thus, a contractor may lose its lien rights if it begins a project as a registered contractor under the Act but fails to renew its registration more than 90 days prior to recording a claim of lien.

In Barnson, the Idaho Supreme Court liberally construed the Act’s penalty provisions in favor of compensating contractors for work performed while registered. As this recovery is based only upon the contractor’s lien rights, it is imperative that contractors timely register under the Act and continuously maintain their registration status to take full advantage of Idaho’s lien laws.

(Published by the Idaho Business Review, July 2010)

Who is liable for a construction project’s on-site safety: the construction manager (CM), the various contractors, or the owner? Idaho’s general rule is that that party having control of the premises may be liable for failure to keep the premises in safe condition. Whether a CM is in “control” of a construction site is governed by the contractual relationship between the owner and the CM and the contracts with the contractors performing work on the project. Specific contractual language concerning the CM’s responsibilities for “safety” on a project may put a CM in control of a construction site and subject the CM to potential liability for any on-site injuries.

A CM acts as a “project constructor” when it contracts directly with both the owner and contractors on a project. Typically this type of contractual relationship is governed by either: (1) the AIA-A121/AGC 565 document for project with a guaranteed maximum price; or (2) the AIA-A131/AGC 566 document for a cost plus fee project with no guaranteed maximum price. Both documents define the CM as a “Contractor” general conditions.

The following A201, Article 10 provisions give an example of express contractual language that gives rise to CM control over a construction site.

  • a. 10.1.1 - The Contractor shall be responsible for initiating, maintaining and supervising all safety precautions and programs in connection with the performance of the Contract.
  • b. 10.2.1 - The Contractor shall take reasonable precautions for safety of, and shall provide reasonable protection to prevent . . . injury . . . to employees on the Work and other persons who may be affected thereby.
  • c. 10.2.6 - The Contractor shall designate a responsible member of the Contractor’s organization at the site whose duty shall be the prevention of accidents.

A CM who contracts with an owner as a project constructor and uses the AIA/AGC documents will probably be deemed to have control of the construction site and thus could be liable for any injuries that occur on the site until the project is turned over to the owner.

A CM acts as a “project advisor” when it contracts directly with the owner and the owner contracts directly with the contractors on a project. Generally this type of contractual relationship is governed by the AIA-B801document. The B801 does not define the CM as a “Contractor” and incorporates the AIA-A201/CMa as general conditions. The following B801, Article 2 contract provision gives an example of express contractual language that protects a CM from taking control of the construction site.

  • d. 2.3.12 - The Construction Manager shall review the safety programs developed by each of the Contractors for purposes of coordinating the safety programs with those of the other Contractors. The Construction Manager’s responsibilities for coordination of safety programs shall not extend to direct control over or charge of the acts or omissions of the Contractors, Subcontractors, agents or employees of the Contractors, or any other persons performing portions of the Work and not directly employed by the Construction Manager.

A CM who serves only as a project advisor under the AIA-B801 documents will likely be deemed to not be in control of the project site and thus not liable for on-site injuries. However, the CM may incur liability for construction site injuries if its role as an advisor is expanded to include direct control over site safety.

Recently, the Pennsylvania Supreme Court held that a CM was liable for injury to a general contractor’s (“GC”) employee even though the prime contract stated that the GC was solely responsible for safety on the project. The court looked beyond the prime contract and focused on the contract between the CM and owner to determine whether the CM had control of the construction site for safety purposes.

The Pennsylvania court distinguished a prior case in which an engineering firm with safety obligations on a project was not held liable for an on-site injury. The court drew a distinction between implementing a plan and monitoring the contractors’ safety plan. The CM was held liable for on-site safety because its contractual obligation included creating, implementing and monitoring a construction site safety plan. The engineering firm who was obligated only to monitor the contractors on the project to safety programs was not held liable for on-site injuries.

Although Idaho courts have not specifically addressed this issue, both the project owner and the CM should carefully review the contract language to ensure each party understands the scope of responsibility undertaken.

A CM may limit the scope of its on-site safety responsibilities by taking the passive role of monitoring the safety programs of the performing contractors. On the other hand, assuming an active role in the creation and implementation of a safety program would justify an increase in the fees charged to the owner because it could open the door to liability for the CM.

(Published in the Idaho Business Review, July 2007)

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