In a recently published case dealing with issues of first impression, the California Court of Appeal Second Appellate District in Los Angeles held that the disgorgement penalty under Business and Profession Code § 7031(b) must be made within one year of completion or cessation of the performance of the project, and that time is not extended by the discovery rule. Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc., 2020 WL 5035826 (Cal. Ct. App., Aug. 26, 2020). BPC § 7031(b) permits a party who uses the services of an unlicensed contractor to recover any and all money paid to the contractor for its work—regardless of the quality of the work (indeed, even if the construction was flawless). The purpose of this harsh forfeiture provision is to deter unlicensed contractors from performing construction.Read More
COVID-19 has made its way into various industries throughout the world, and Pennsylvania’s construction industry is no exception. All commercial construction activities throughout the Commonwealth, with a few limited exceptions, have been halted indefinitely to assist in mitigating the ongoing spread of the coronavirus. Similarly, construction supply chains in Pennsylvania, the U.S., and abroad have either limited supply or halted material production altogether, which may result in severe construction delays throughout Pennsylvania once construction projects are cleared to continue. Given the current (and likely ongoing) state of flux faced by Pennsylvania’s construction professionals, it is important that contractors familiarize themselves with the state-specific legal concepts currently at play and consider practical efforts to help curtail the economic impact of COVID-19.
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On February 17, the First District Appellate Court issued an opinion regarding the Implied Warranty of Habitability in the case of Sienna Court Condominium Association v. Champion Aluminum Court et al. The opinion involved three separate appeals: the first relating to claims by Sienna Court Condominium Association (“Sienna”) against an insolvent developer and an insolvent general contractor; the second involving the dismissal of Sienna’s claims against the architect, the engineers, and suppliers; and the third involving the dismissal of the general contractor’s claims against its subcontractors.
To read the full alert on K&L Gates HUB, click here.
In California, general contractors can “reasonably rely” on subcontractors’ bids when submitting their own bids to the owner. In Flintco Pacific, Inc. v. TEC Mgmt. Consultants, Inc., Case No. B258353 (July 19, 2016), the California Court of Appeal addressed what constitutes “reasonable” reliance, holding that it was unreasonable for a general contractor to rely on a subcontractor bid based on price alone, while ignoring other, material conditions of the offer.
In Flintco, Flintco Pacific, Inc. (“Flintco”), a general contractor, received a bid from TEC Management Consultants (“TEC”) to perform subcontract work on a community college building project. In addition to the bid price of $1,272,960, TEC’s bid included the following conditions: (1) a 35% up-front deposit; (2) the right to withdraw its bid if not accepted within 15 days; and (3) a minimum 3% price escalation, per quarter, after the 15-day acceptance period. Flintco used TEC’s bid price in compiling its own bid and was awarded the contract in July 2011. Read More
On August 4, 2016, the Supreme Court of New Jersey unanimously affirmed the Appellate Division’s holding that consequential damages caused by a subcontractor’s faulty workmanship constitute “property damage” and an “occurrence” under the 1986 Insurance Services Office, Inc. (“ISO”) form commercial general liability (“CGL”) insurance policy. This holding is welcome news to real estate developers, general contractors, and commercial policyholders who may seek coverage for damage caused by the faulty work of their subcontractors.
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By Joseph B.C. Kluttz, K&L Gates, Charlotte
“God looks out for drunks, fools and construction lawyers.”
— with apologies to Otto von Bismarck
Many contractors and non-bankruptcy practitioners are generally aware that upon the filing of a bankruptcy petition a variety of collection impediments spring into existence, including indignities like the “automatic stay,” lien-trumping provisions and “preferences.”
Many involved in the construction industry may be unaware, however, that because of special provisions and exemptions applicable to mechanics’ liens in bankruptcy, a contractor (or subcontractor) may be able to improve its position dramatically on the eve of — or even after — the filing of a bankruptcy petition by a counterparty. That could become increasingly important as clouds of economic and political uncertainty continue to gather on the horizon.
By Camilla de Moraes, K&L Gates, London
The English courts have recently considered a number of cases involving the FIDIC suite of contracts (see here, here, and here for our previous blog posts). The most recent case of J Murphy & Sons Ltd v Beckton Energy Ltd  EWHC 607 (TCC)arises out of a contract based on FIDIC Conditions of Contract for Plant and Design Build for Electrical and Mechanical Plant and for Building and Engineering Works designed by the Contractor First Edition 1999 (FIDIC Yellow Book) with amendments.
The court was required to consider the relationship between two clauses in the Contract, namely Sub-Clause 2.5 (Employer’s Claims) and Sub-Clause 8.7 (Delay Damages and Bonus) with reference also to Sub-Clause 3.5 (Determinations) and 4.2 (Performance Security). The issue in dispute was whether determination by the Engineer of the contractor’s liability for liquidated damages was a pre-requisite to recovery of liquidated damages by the Employer. The court held that the clause entitling the Employer to liquidated damages operated outside of the regime in Sub-Clause 2.5 and therefore the Engineer’s determination was not a pre-requisite to the Employer’s entitlement. This case also confirms the traditionally held view that obtaining injunctive relief preventing a beneficiary from calling on a performance bond will rarely be possible.
The consequences for a contractor who delays in submitting an application for an extension of time, or who gets his payment application in late, can differ dramatically depending on the contract terms and also the governing law of the contract.
In order to ensure contractors submit their claims as they arise (rather than ‘roll them over’ to the end of a project) and to assist in efficient cash-flow management, it is common practice for both bespoke and standard form contracts to include express procedures for submitting claims for time, money or other relief. Provisions dealing with claims for an extension of time for example will frequently stipulate time limits for each of the following:
- the initial notification of the events giving rise to the claim,
- submission of particulars,
- a response/request for further particulars on behalf of the employer, and
- an assessment of what if any extension should be awarded.
What happens though if one of the parties does not complete the relevant action or step forming part of the procedure within the stipulated time?
This will depend first on what the contract says the consequences are to be. The usual practice in the standard forms mentioned above is to expressly provide that a failure to (say) submit the particulars of the claim strictly in accordance with the time period prescribed will invalidate the claim i.e the claim becomes “time barred”. Looked at in another way, such express provisions are seeking to make timely submission of the required particulars a condition precedent to recovery.
This raises the interesting question of whether such time bars are enforceable. On the one hand it would seem disproportionate to bar a substantial claim if a contractor was only one day late in filing its claim, but on the other hand, an employer might have made certain assessments as to liability and closed its position with respect to issues in relation to the events surrounding the claim. It would arguably be unfair to ignore the terms of the contract and permit the employer to continue to be exposed to claims.
The issue of enforceability will depend to a significant extent on the law of the contract. In common law systems such as the United Kingdom for example, clearly drafted time bars (such as those found in FIDIC sub-clause 20.1 and NEC3 clause 61.3) have in the past generally been enforced.
An issue which is however currently generating debate in the UK is how to properly assess the time period for first notifying an event. NEC3 clause 61.3 states that if the contractor does not notify a compensation event (i.e a variation) “within 8 weeks of becoming aware of the event, he is not entitled to a change in the Prices [or] the Completion Date”. FIDIC sub-clause 20.1 requires the contractor to give notice “as soon as practicable and not later than 28 days after the contractor became aware, or should have become aware of the event or circumstance [giving rise to the claim]”. Although both clearly state the condition precedent aspect of the timely giving of notice, the more difficult issue is when does that time start running?
There is frequently a delay between the time an event occurs, and when the effect of that event as giving rise to a claim is identified. Equally, for an ongoing event which spans several days or weeks (such as a prolonged period of bad weather), should notice be given on day one (on a ‘just in case’ basis even though the duration and effect of the event are unknown) or at the end of the event (which the effect is known but with the risk the employer will say you have given notice too late?). These were the type of issues considered by the UK courts in the 2014 case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar where the court said the notice provisions should be construed broadly, meaning the time should be calculated from when the contractor became aware (or should have become aware) of the delay, rather than from the date of the event itself.
Across the common law jurisdictions, the hardest line against time bars is taken in Australia, with the 2012 decision in Andrews v Australia and New Zealand Banking Group Ltd that such time bars can be unenforceable as penalties.
The approach in civil code jurisdictions such as the GCC generally take the middle ground.
The UAE Civil Code neither expressly prohibits time bars nor enforces them.
Instead, prescribed time periods need to be read in the context of certain provisions of the UAE Civil Code including:
- Article 106 – prohibiting the exercise of rights if the desired interest or result is disproportionate to the harm that will be suffered by the other party;
- Article 246 – requiring the parties to act in good faith; and
- Article 249 – prohibiting a party from exercising its rights in a manner that is oppressive or abusive
These provisions, read together, have the effect of meaning that time bars are neither expressly permitted nor expressly prohibited under UAE law. Instead, consideration will be given to matters which under common law are considered as being “equitable principles” such as whether the parties were acting in good faith, whether the actions are oppressive or unconscionable, and whether the benefit enjoyed by one party will be disproportionate to the harm suffered by the other party. Although such an approach is to be commended, since it ensures that a party is prevented from unnecessarily abusing its position under the contract, it does mean that the terms of the contract may be ignored in some instances. It is not clear as to the frequency at which courts in the UAE are willing to intervene and override the express terms of the contract, and this is an area we are continuing to monitor with interest.
Of course, a different scenario arises if a clause is silent on the consequences of a failure to submit a claim strictly in accordance with the time period prescribed by the construction contract. The question then becomes whether a time bar is implied when the prescribed steps to making a claim are not followed. One of the leading authorities on time-bars is Brember Handels GmbH v Vanden Avenne Izegem PVBA, HL which is authority for the proposition that, for a notice requirement clause to be a condition precedent, the clause must state the precise time for service and make it plain by express language that unless the notice is served within that time, the party required to give notice will lose its rights under that clause. Hence the conclusion should be that time bars will never be implied. However notably Jackson J in Multiplex Construction (UK) Ltd v Honeywell Control Systems permitted a time bar to be implied despite the contract being silent on the matter. Some commentators however have suggested that a clear intention for a condition precedent is required, and that the decision in Multiplex can be distinguished on the basis of the Prevention Principle. Although there is no clear guidance in the UAE on whether a UAE court would be willing to view notice requirements as a condition precedent without clear words to that effect, in our view the UAE courts do not follow the principles which are equivalent to those in Brembar but instead weigh up the circumstances of each case and determine the fairest approach.
  EWHC 1028 (TCC)
 (2012) 290 ALR 595
  2 Lloyd’s Rep 109
  EWHC 477 (TCC)
I. HICPA Does Not Foreclose Contractors From Recovery Under A Theory Of Quantum Meruit.
The Supreme Court of Pennsylvania recently held that the Home Improvement Consumer Protection Act, 73 Pa. C.S. § 517.1-517.18 (“HICPA”), does not preclude a contractor from recovering under the theory of quantum meruit in the absence of a valid and enforceable home improvement contract. Shafer Elec. & Const. v. Mantia, 96 A.3d 989 (Pa. 2014). The decision affirmed the holding of the Superior Court of Pennsylvania, albeit on slightly different grounds.
Instead of focusing on the General Assembly’s intent (as the Superior Court of Pennsylvania did), the Court relied on Durst v. Milroy General Contracting, Inc., 52 A.3d 357 (Pa. Super. 2012), holding that “the plain, unambiguous language of Section 517.7(g) does not prohibit the cause of action in quantum meruit.” Shafer Elec. & Constr., 96 A.3d at 996. The Court noted that “[i]t is well settled at common law . . . that a party shall not be barred from bringing an action based in quantum meruit when one sounding in breach of express contract is not available,” and that “[w]hile traditional contract remedies may not be available due to the contractor’s failure to adhere to Section 517.7(a) . . . Section 517.7(g) does not contemplate the preclusion of common law equitable remedies such as quantum meruit when a party fails to comply with subsection (a).” Id. The Court concluded that “[i]f the General Assembly had seen it fit to modify the right of non-compliant contractors to recover in contract or quasi-contract, statutory or common law, or otherwise, it could have done so,” but did not. Id.
The Court’s decision has important implications for contractors’ ability to use Pennsylvania’s mechanics’ lien law, 49 P.S. § 1101, et seq. as a tool in recovering unpaid amounts owed for work performed on a home improvement project. In Pennsylvania, mechanics’ liens must be based on a contract, either express or implied. See 49 P.S. § 1201 (defining “contractor” as one who, “by contract with the owner, express or implied, erects, constructs, alters or repairs an improvement . . . or furnishes labor, skill or superintendence . . . or supplies or hauls materials, fixtures, machinery or equipment reasonably necessary for and actually used . . .”) (emphasis added). The Court’s holding preserves a home improvement contractor’s ability to file and obtain a judgment on a mechanics’ lien based on an implied contract and in the absence of an express contract (i.e., where the contract does not comply with Section 517.7(a) of HICPA).
II. Quantum Meruit Allows Recovery Of The Value Of The Work Performed.
The Supreme Court of Pennsylvania’s decision in Shafer makes clear that contractors found to have an invalid home improvement contract under HICPA are still able to recover money for work performed by bringing a quasi-contract claim under a theory of quantum meruit. Where a contractor is successful in bringing a cause of action in quantum meruit, the contractor is entitled to recover the value of the benefit conferred on the homeowners. See, e.g., Durst, 52 A.3d at 360 (quoting Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 2 A.3d 526, 532 n.8 (2010) (“Quantum meruit is an equitable remedy to provide restitution for unjust enrichment in the amount of the reasonable value of services.”) (citing Black’s Law Dictionary (8th ed. 2004))); Com., Dep’t of Pub. Welfare v. UEC, Inc., 397 A.2d 779, 782 (Pa. 1979) (amount owed under a quantum meruit theory was “the reasonable value of the services performed”). As such, contractors should be prepared to prove the value of the services performed and materials provided on the project to recover under a theory of quantum meruit. Although the cost of materials and labor expended is normally a good proxy for the value conferred on a particular project, contractors should be mindful that under certain circumstances the value conferred may exceed the contractors’ costs and that, in those circumstances, relying on the contractors’ costs may undervalue the contractors’ quantum meruit claim.
III. The Case Law Interpreting HICPA Is Scarce.
There is a relative lack of caselaw interpreting HICPA and stating under what circumstances HICPA should apply. The legislative history of HICPA suggests that HICPA should not apply to all home improvement projects—in particular, those involving sophisticated homeowners (i) who have a contractor that fully performed, and (ii) who have obtained all of the benefits of the contract but have not complied with the burdens (i.e., payment). Given the undeveloped nature of the caselaw interpreting HICPA, contractors attempting to recover payment for unpaid work based on a home improvement contract should (if the facts permit) assert causes of action (or facts supporting causes of action) for both breach of contract and, in the alternative, quantum meruit recovery.
 The Superior Court of Pennsylvania focused its rationale on canons of statutory construction to ascertain legislative intent. See Shafter Elec. & Constr., 96 A.3d at 996.
 Section 517.7(g) “Contractor’s recovery right,” provides:
Nothing in this section shall preclude a contractor who has complied with subsection (a) from the recovery of payment for work performed based on the reasonable value of services which were requested by the owner if a court determines that it would be inequitable to deny such recovery.
Shafer Elec. & Constr., 96 A.3d at 992.
 The General Assembly enacted HICPA to protect vulnerable consumers, such as the elderly, infirm, and first-time homebuyers from predatory contractors (i.e., contractors that abscond with homeowners’ money without completing the work). See 2008 Pa.H.R. Jour., No. 65 p.2292 (Statement of Representative Preston) (“If you care about the senior citizens or the young couple who is buying a first-time starter house and they want to be able to remodel it and not be able to be ripped off,” then “I am going to ask [those] members…to support the Tomlinson bill.”); 2008 Pa.H.R. Jour., No. 64, p.2199 (Statement of Representative Marsico) (the Pennsylvania Legislature’s intent behind HICPA was to “address the problems of home improvement contractors who take people’s money and leave town without doing the work”).
In a matter of first impression in Technica, LLC ex rel. United States v. Carolina Casualty Ins. Co., No. 12-56539, 2014 WL 1674108 (9th Cir. April 29, 2014), the Ninth Circuit held that California’s contractor’s licensing law, does not bar unlicensed contractors from recovering on Miller Act claims. The Ninth Circuit’s refusal to impose state law limitations on a contractor’s remedies under the federal Miller Act is consistent with prior rulings of the Supreme Court and the Eighth and Tenth Circuits. In the interest of uniform enforcement of federal law and the reduction of hurdles to recovery by federal subcontractors, the Ninth Circuit reversed the district court’s grant of summary judgment to the prime contractor and its surety.
The underlying dispute arose from work performed in connection with the federal work of improvement located in California on the ICE El Centro SPC – Perimeter Fence Replacement/Internal Devising Fence Replacement (the “Project”). Candelaria Corporation, as prime contractor, secured a payment bond from its surety, Carolina Casualty Insurance Company (“CCIC”), in connection with the Project. Candelaria’s sub-subcontractor, Technica, LLC (“Technica”) provided almost $900,000 worth of labor, material, and services to the Project, yet only received payments for this work in the amount of $300,000. Technica did not possess a California contractor’s license during its performance of the work at issue. Invoking its rights under the Miller Act to recover the outstanding amounts, Technica filed a complaint in district court against Candelaria and CCIC. Pursuant to California Business and Professions Code section 7031(a), which bars a contractor from recovering compensation for work that was performed without a license, Candelaria and CCIC sought, and were granted, summary judgment of Technica’s claims. Technica appealed.
On appeal, the Ninth Circuit emphasized that the purpose of the Miller Act is to provide a remedy to contractors and materialmen denied compensation on federal construction projects. The Miller Act requires a general contractor on a federal project to obtain a payment bond for the benefit of “persons supplying labor and material in carrying out the work provided for in the contract.” 40 U.S.C. § 3133(b)(2). Since it is the Miller Act, and not California state law, that provides Technica with a right to recover on the Project, the Ninth Circuit reasoned that the scope of this federal remedy should not be conditioned by state law. In reaching this conclusion, the Ninth Circuit drew upon the holding of the Supreme Court in F.D. Rich Co. Inc. v. United States ex rel. Indus. Lumber Co., 417 U.S. 116, 127 (1974), and other similar Circuit Court decisions. In F.D. Rich, the Supreme Court relied upon the federal interest in uniform application of the law in determining that state law could not be used to provide an award of attorney’s fees to a Miller Act claimant when federal law provides no such right. F.D. Rich, 417 U.S. at 127-28. In Aetna Casualty & Surety Co. v. United States ex rel. R.J. Studer & Sons, 365 F. 2d 997 (8th Cir. 1966), the Eighth Circuit held that a Colorado law requiring a partnership to record an affidavit with the county recorder’s office was not applicable to the contractor’s Miller Act claim. Likewise, in Hoeppner Constr. Co. v. United States ex rel. E.L. Magnum, 287 F.2d 108 (10th Cir. 1960), the Tenth Circuit acknowledged that the Miller Act is highly remedial, and therefore the contractor’s remedies thereunder should not be limited by a South Dakota statute forbidding enforcement of a contract on behalf of a foreign corporation.
The Ninth Circuit’s decision does not change any current California law. Nonetheless, the decision is significant for its fresh look on the purpose of the Miller Act. Construction counsel should take note that courts may be unwilling to limit the remedies of contractors under the Miller Act in accord with state law requirements.