Not ready? Then wait. No rush.

E-Verify? Uh, what? That might be your response as a contractor – and I wouldn’t blame you. To date, E-Verify has only hit the largest of federal contractors. Rest assured though that it is coming to a small business near you.

It has been a long while since I last talked about E-Verify. I first chronicled its emergence in Washington state, and then discussed the proposed federal legislation aiming to implement it nationwide. Check out those prior posts if you want to learn more about E-Verify.

In brief, E-Verify is an online web application produced by the federal government. The system allows a user (employer) to log in and check the employment status of its employees. Right now, federal contractors are required to use the system to verify workers on federal contracts – this includes Washington state federal jobs.

The Legal Workforce Act (H.R. 2885) has tried to bring mandatory use of E-Verify to all the states – for all employers. The Act seemed to gain a bit of traction in 2012, but was derailed once lawmakers heard the pleas of employers, who feared a transition to a system they do not understand. The Washington Post recently described this hardship:

 This legislation would give small businesses just 12 to 24 months to begin using the E-Verify system to determine that their employees are legal. It has been estimated that businesses with fewer than 500 workers would bear the greatest burden of E-verify, spending about $2.6 billion a year, compared with less than $100 million for the four percent that used it in 2010.

I know a bit about web applications. Currently, I am developing one for ClaimKit, a company that provides document management for sureties. Developing a web application is not easy and bumps in the road are expected. But the E-Verify system has some significant issues that need fixed before it can be mandatory for all employers.

A research institute has said that over 3% of workers are deemed authorized to work, when they are not in fact authorized to work. Furthermore, close to 1% of workers are said to be unauthorized when they are actually authorized, leading them into a bureaucratic mess to fix the problem and get them back on the job. The institute said that E-Verify will deny up to 420,000 workers annually. Yowza!

Now, fixing those errors has already proven to be difficult and lengthy. What happens when we overload the system with 10 times the amount of users? Your guess is as good as mine. But having been through the process of bug fixing, I can safely say that the “error fixing” process will become worse and much more lengthy.

I am not completely against using E-Verify. But employers need to be assured that (a) the system will work correctly, (b) the government can timely fix errors that won’t disturb the workflow and (c) use of the system is made simple, with adequate training available.

These are all elements that I think about when developing ClaimKit. Why would I ever let my users operate within a broken system? Doing so causes only more headaches than I already have. The federal government is facing a similar dilemma and needs to take the time to fix the service before unleashing it upon a nation of untrained employers.

A seatbelt for your subcontracting business - E&O (photo by boutmuet on Flickr)

Good news subcontractors – you can get E&O insurance.  Recent additions to the subcontractor insurance package includes coverage for errors & omissions, which will help to close a considerable gap in existing general liability policies. This is an easy way to avoid a legal fee – because coverage should pay it for you.

Construction litigation can become costly, very fast. When a building owner or general contractor finds a debatable problem with a subcontractor’s work, a lawsuit is likely to follow. Most contractors will inevitably defer the defense of that suit to their insurer. If the subcontractor  is sued for its own defective or incorrect work, there will be no coverage from their CGL policy. Sometimes, the subcontractor might talk the insurer into providing a defense to claims, but rarely are the insurers on the hook for the inevitable damages.

The biggest reason for your lack of coverage is the exclusion for damage to “your work” or “your product.”  For these types of damages (defective work), contractors would need to rely on an E&O coverage. Luckily for them, it is out there. E&O coverage will fill a sizable gap in your liability coverage, paying for legal fees along the way.

According to a recent report, “E&O insurance is available for small contractors, with more affordable premiums and coverage designed to meet the needs of this growing market. It helps fill the coverage gap in general liability policies and some programs have expanded eligibility to many more classes, including HVAC dealers and distributors, janitorial contractors, locksmiths, septic tank cleaners, masonry contractors, interior tile and stone artisans, and other specialty trades.”

While the coverage is fairly new to this demographic, the coverage seems about right. Subcontractor E&O limits range from $5,000 up to $100,000, carrying per job premiums of between $500 and $5,000. Subcontractors who want to guarantee their work, or sell additional assurance to their customers might think about syncing up with a broker and passing on the cost of E&O insurance to their customers. It can provide much needed assurance for the customer, while protecting subcontractors against significant risk.

The Phillip Merrill Env. Center is LEED Platinum, yet falling apart. (Photo: Andreas Kollegger on Flickr)

What do we really know about new building technology? What is green today can be gangreen tomorrow. This is what we learned from the Salem Courthouse Square project, one of the first LEED Certified buildings. Now, word out of Maryland is that the first ever LEED Platinum building has some major problems.

My good friend Stuart Kaplow (the most enthusiastic green attorney on the planet) recently released a new article in his periodic newsletter. Besides recommending that you all should subscribe to Stuart’s newsletter, I wanted to briefly point out the Phillip Merrill Environmental Center dispute. Since Stuart did such a good job laying down the facts, I lend you his words:

Just last month, the U.S. District of Maryland dismissed a more than $6 Million law suit filed over the first certified LEED Platinum building. The Chesapeake Bay Foundation had asserted breach of contract and negligence against Weyerhaeuser arising from construction of the LEED certified Phillip Merrill Environmental Center building on the shore of the Chesapeake Bay that had “contemplated the use of recycled and environmentally friendly materials,” including certain wood columns and beams fabricated using wood waste materials. Sometime after the building was completed in 2000, it rained and some of the “exposed wood members” got wet and swelled and shrinked resulting in “cracking at the joints” giving rise to litigation commenced some 10 years later in 2010. On March 23, 2012, the court dismissed the case in favor of Weyerhaeuser holding “that Plaintiffs’ cause of action accrued no later than May 2002 and expired more than half a decade before they filed suit.”

While the Chesapeake Bay Foundation uses its website to continue to applaud the “green” features of this building, I cannot help but wonder what that lawsuit might have looked like. Often we are stripped of valuable courtroom debate because of the expiration of claims. I support statutes of limitation and certainly rely on them in advising clients – but what a debate this could have been.

Green building defective construction cases have been slow to rise through the cracks of courts. This is great news for everyone in the industry. But there is certainly a sample out there – and many of the problems we are seeing result from the use of new, sustainable or untested materials and technologies.

The point: be cautious. There are a number of things that builders, suppliers and even manufacturers can do to reduce risk. Stuart was spot on when reminding us all that the contract is your best friend, and can save you from serious liability. Planning, testing, clear agreement and sound legal advice is key.

Halt the heavy equipment! Read your contracts before doling out the same old template

I love writing this column, because I think it’s refreshing for contractors to hear that they don’t always need an attorney. Today’s post is the “Un-Save a Legal Fee” because I want to point out a specific illustration of when you definitely need your attorney. Using a construction contract template can be fine, but you always need to consider its application to each project – or it could bite you in the rear.

Seattle attorney Paul Cressman published a prime depiction of bad contract management, last week. A Florida appellate court struck down a general contractor’s “pay if paid” clause when it became ambiguous because of some incorporated language from its prime contract. Specifically, a clause in the prime contract required the general contractor to pay all subcontractors before receiving payment from the owner, while the general contractor’s “pay if paid” clause required its subcontractors to wait for payment until it arrived from the owner.

Wait, don’t these two clauses clash? Clearly. How can they be read together? They cannot. Here, the court got it dead on. When the general contractor incorporated the terms of its prime contract into its subcontractor  agreement, the “pay if paid” provision became ambiguous because it purely conflicted with the upward payment provision. By the general rule of contract law, the ambiguity had to resolved against the general contractor, who had drafted the agreement, and in favor of the subcontractor.

To the normal contractor, construction agreements are lengthy, dull and often burdensome. This result makes contract templates even more appealing. Contract templates are a great investment and should be used by all contractors. But the same contract does not always work for every project. Failing to read the contract as a whole and apply each of its terms across each incorporated document can be a nightmare. This is a classic depiction of ambiguity, perhaps the most common contractual failure. This type of error happens much more often than most probably would guess, especially when your contract incorporates other documents that change from project to project.

The cure – have your counsel take a few hours to go over your prime contracts and ensure that they match with your  vendor agreements. Virtually every general contractor incorporates the prime contract into their vendor agreements, because they want to cover their own butt and ensure that they can pass down the obligations that they have to the owner. So, be cautious and clearly understand what you are passing down.

***Save a Legal Fee is a recurring column providing simple tips to contractors. The tips provided are not intended to be legal advice and should not replace legal advice from your attorney. The authors are simply providing this information for educational purposes and as a resource for contractors who may be unable to locate the law on a particular subject. All information provided is used at your own risk.***

Doh!!! - is right. Don't work without a registration.

Washington is harsh, but perhaps right on point. If you perform the work of a contractor in Washington, you must be registered with the Department of Labor & Industries and carry a bond and insurance. If you do not – don’t ever expect to file a lien or sue someone for payment.

Other states do allow unregistered or unlicensed (depending on what they call it) to collect payment for their work by raising a claim in a court of law. Those states that permit such a recovery typically do so under the laws of unjust enrichment, meaning that the worker can get paid for the reasonable value of it’s provable work. That means that they cannot recover the value of any contract they sign, but at least they get something.

Washington takes the most strict of approaches. If you perform work without a contractor registration, you have no claims for payment. That means no ability to file a lien, bring a small claims action or sue in contract law – nothing, nada, zilch.

RCW 18.27.010 defines a “contractor” – and you better believe that the definition is broad. Just about any type of improvement work – from removing a tree to hanging a cabinet – is considered the work of a “contractor” requiring registration. Even homeowners working on their own behalf should have cause for concern these days, because in 2007 the law changed to prevent home “flippers” from building without a registration. Now, you must live in your home for 1 year after construction – or suffer the penalties of an unregistered contractor. (***Be aware that there are a few small and narrow exemptions in RCW 18.27.090***)

The prohibition against recovery is put forth in RCW 18.27.080. The law provides that “[n]o person … may bring or maintain any action in any court of this state for the collection of compensation for the performance of any work … without alleging and proving that he was a duly registered contractor.”  This principal is restated in the lien statute, where RCW 60.04.011 defines a potential lien claimant as one who is registered if required to be registered by the State of Washington.

You might ask whether I missing something here though? There have to be some carve outs in the courts?  You would be mistaken. The Courts have routinely upheld that an unregistered contractor cannot recover payment for its services. Andries v. Covey, 128 Wn. App. 546, 550, 113 P.3d 483 (2005) dismissed a lien claim filed by a person who was acting as an unregistered contractor. The Court, in Stewart v. Hammond, 78 Wn.2d 216, 220, 471 P.2d 90 (1970), stated the fact that the law discourages noncompliance with RCW 18.27, “by providing a criminal penalty, RCW 18.27.020, and by denying offenders access to the courts for collection of compensation for performance of work or for breach of contract. RCW 18.27.080. Thus, your demand for payment, as an unregistered contractor, might be met with both a letter from the contractor/owner denying payment and a letter from L&I slapping you with a gross misdemeanor (or several), hefty fine and a two-year audit. Worst of all, if you filed a lien you can have it removed in a matter of weeks and be on the hook for the homeowners legal fees. (See RCW 60.04.081)

The moral of the story: Get Registered. You can follow this link to find out more on how to get registered. L&I provides simple advice for getting registered quickly. The cost of compliance is far outweighed by the cost of non-compliance.

***Save a Legal Fee is a recurring column providing simple tips to contractors. The tips provided are not intended to be legal advice and should not replace legal advice from your attorney. The authors are simply providing this information for educational purposes and as a resource for contractors who may be unable to locate the law on a particular subject. All information provided is used at your own risk.***

Nice work, Olympia.

Contractual fairness – it is part of my mantra. If you read the blog, you probably know that I preach brevity, balance and clarity in contracting. The State of Washington did well to finally eliminate something that has angered me for quite some time – unfair indemnification.

One of my favorite construction contract revisions is mutual indemnification. Many “up the chain” contractors and owners are going to stick you with a unilateral indemnification clause that protects them for just about everything, including their own fumbling of a project. Adding mutual indemnification provides some balance, and keeps parties reliant upon each other for success on the job site.

Many indemnification clauses cover the kitchen sink – including a party’s own negligence. That means that as a contractor, manager or designer, you could be expected to atone for an error or loss that resulted from your contracting party’s own negligence. Up until now this was legal, as long as the damage covered was a financial/contractual one and not a personal or property injury one.

How does that make sense you say? It doesn’t. What it does is allow the indemnified party to dump a mess of problems in your lap (some your issues, and some their own) and tell you to hire a lawyer and fix it – at your cost. However you look at it, it is unfair.

The State of Washington signed an important common sensical bill to eliminate these type of provisions. Substitute House Bill 1559 amends RCW 4.24.115 to broaden the existing law and clarify what types of indemnification are unenforceable. The existing law prohibited indemnification for the indemnified party’s sole negligence, but only as to eventual liability for bodily injury and property damage. Here is what the new law does in a nutshell:

• Expressly Adds Design Professionals –  Designers can now rest easy that the prohibition in the statute protects against unfair indemnification in architectural, landscaping, engineering and land surveying contracts – not just construction agreements.

• Broadens Prohibition to All Damages – The new law prohibits unfair indemnification for sole negligence that results in any type of damage, whether financial or otherwise contractual.

• Includes Both Duties to Indemnify and Defend – The new law also broadens the prohibition against clauses that require ultimate indemnification (the obligation to pay the damages) but also clauses that require immediate defense (obligation to provide and pay for legal defense).

SHB 1559 is a major win for the construction industry. Kudos to the group of design professionals that helped push it through. All involved should celebrate this fair addition to the law. For more on SHB 1559, check out previous posts at Ahlers & Cressman and Mike Purdy’s Public Contracting Blog.

A contractual claim period can eliminate the long wait to claim prescription

Ever had that lingering problem with a contracting partner that went away for awhile and then came back to bite you – years later? In Washington, construction contract claims can be raised for up to six years after substantial completion. Six years!? Why would I want to wait that long to find out if I have a problem? You don’t have to.

Over the past few years, I have discussed the notion of “contractual claim periods” on The Builders Counsel. For today’s Save a Legal Fee column, I cannot think of a better topic. These provisions are specifically intended to save you from unnecessary legal fees that might arise if a problem goes unnoticed for too long.

Contractual claim periods are simply a way to reduce the amount of time that a contracting party has to raise a claim against its contracting partner. For example, a subcontractor might require that a general contractor raise any claim that it might have – for defective or incomplete work, injury, damages, etc – within a particular amount of time or forever lose the ability to raise the claim in a legal proceeding. The claim period used in the contract can be significantly shorter than that provided by law (6 years) and require a particular type of formal notice to effectively raise the claim.

How short can you make a claim period? Unfortunately, there is no easy answer and it depends on determining what is a reasonable amount of time to determine whether the damages or claim exists. Several courts have analyzed this issue. One of the more recent cases on the issue in Washington (though an unpublished one) is Pedowitz v. Above All Roofing Specialist. In that case, the court easily upheld a contractual claim period that required the claimant to file a lawsuit within 18 months of substantial completion.  Other lawsuits have simply permitted contractual claim periods that require notice by letter – and only within a matter of months after project completion. It is now typical to see contractual claim periods of one year in contracts.

The validity of contractual claim periods flow from the court’s holdings in Mike M. Johnson and in various other cases. Courts will uphold the parties’ contractual wishes. If you agree to a contractual claim limitations period, and the court finds it unambiguous and valid, it will be upheld. In Pedowicz, the clause was fairly clear: it applies to all claims and it must be filed within 18 months from substantial completion. 

So, in order to limit your exposure to legal proceedings and liability, think about using a contractual claim period that closes the amount of time that a party can raise a claim. If you plan on using one of these provisions, be sure to be clear about what claims must be raised (all v. contract v. tort), how they are raised (letter v. lawsuit), and when they are raised (1 year from the date of contract v. 18 months from substantial completion).

Yep, construction law blogs pump out tons of free construction law education

It’s somewhat remarkable how poorly my colleagues and I rank in the law blog hierarchy. Visits to law blogs are densely packed into technology, criminal justice, constitutional, and intellectual property law blogs. It’s a fact that construction law blogs just don’t attract the heavy loads of law blog visitors. Well, it’s time to start reading them – they can save you money, time and effort.

Avvo, an online lawyers + consumers community that started in Seattle, has a nice little page that aggregates data on law blog visits. Avvo uses Amazon’s Alexa site statistics, one of the best indicators of actual site traffic. Not only does Alexa traffic unique visits, but it also shows regional data that allows you to know where your visitors are coming from. Avvo Top Legal Blogs currently lists 433 total blogs and ranks them based upon their 30 day traffic load.

The statistics show a trend – construction lawyers are not drawing a big crowd. The Builders Counsel is the top ranked construction law blog on the ranking list – topping the charts at……147. Yikes. The wonderful blog of TN attorney Matthew DeVries, Best Practices Construction Law is right behind at 154. The only other construction law blogs that I could find are Construction Law Monitor (from my former law practice, Wolfe Law Group) at 225 and Virginia Real Estate, Land Use & Construction Law Blog (from good friend and VA attorney Tim Hughes) at 316.

There are a number of serious absences on the list. Justia.com’s Blawgsearch is a good tool for determining the heavily-visited law blogs on the web. Taking a peak at some of the high performers at Justia, finds that these blogs would have squeezed into the Avvo rankings at these slots (as of 4/11/12):

#81 — Construction Law Musings (VA’s Chris Hill has a star studded guest post column)

#101 — Construction Law in North Carolina (always relevant and current from Melissa Brumback)

#186 — Green Building Law Update (Chris Cheatham’s LEED-centric blog)

#243 – K&L Gates Construction Law Blog (from Seattle’s massive K&L Gates)

#280 — Green Real Estate Law (a real estate blog, heavily bent on development, from Stephen Del Percio)

#286 — Ahlers & Cressman Law Blog (this is actually their website, since the blog is embedded)

#293 — Washington Construction Law (from big law’s Davis Wright Tremaine)

#297 — Green Building Law Blog (uber-intelligent Shari Shapiro’s blog)

#353 — Colorado Construction Litigation (always near the top at Justia)

My point is that construction attorneys’ hard (free) work is being underutilized. Each of the well-written blogs above have immense amounts of free legal information and education that can be absorbed quickly by contractors, lawyers, and other professionals in the building industry. One of the remarkable benefits of construction law blogs is that they are free – and they can be accessed from your computer, tablet or even your phone. Searching Google for simple terms like “how to file a lien” will mostly provide you with links to some of the aforementioned law blogs.

Take some time to check out these – and other – law blogs and add them to your daily reader. The amount of free education available is indescribable.

Two building go net zero

It started as a Challenge to construct buildings that consume no more energy then they produce. That Challenge required actual performance, not just modeling the building and speculating that it might attain this lofty goal. The Living Building Challenge is now a fully functioning certification process managed by the International Living Future Institute – and they already have their first successes.

The ILFI was formed by the Cascadia Green Building Council, a regional chapter of the USGBC. The USGBC and the CGBC have applauded each other for their own certification programs, even though they theoretically compete against each other for certification dollars. I have discussed the topic a few times here on Builders Counsel.

It’s probably a broken record by now, but the USGBC’s LEED Certification program does not require actual performance to attain certification. LEED 2012 has taken a step in that direction, by requiring resubmission every 5 years to maintain your certification, but clearly the program still certifies projects before they can exhibit measurable performance. The Living Building Challenge does mandate actual performance, requiring 12 months of performance data before certification can be awarded. Because of this commitment to validating that building actually work as they are planned, the Living Building Challenge may appeal to government construction projects over the LEED Platinum certification.

This week, the ILFI announced that it has certified its first two projects. A Salem, OR community building known as Painters Hall and a San Jose, CA office building for Integrated Design Associates, affectionately called IDeAs Z2 Design Facility. Both of these building exhibited net zero energy performance over a 1 year period, including treatment of its own wastewater.

I found it kind of refreshing to see that Salem, OR had gone Living Building. You might remember that Salem is the home of one of LEED’s unfortunate black eye projects, Salem Courthouse Square. The Courthouse Square building had to be evacuated after faulty concrete was discovered. Thankfully, the county responsible for that project has decided to fix one of the first LEED certified projects.

Builders should keep a close eye on the ILFI’s Living Building Challenge. As government regulators look for ways to prove to constituents that its “green buildings” are actually green, the Living Building Challenge becomes much more attractive.

The JOBS Act is a big gain for a changing construction industry.

Financing. It’s a common discussion topic amongst startup businesses and their attorneys. But seldom does it come up in the construction law world. Well, it’s time to talk about it, because with new technologies, new building practices and new niche construction work, the construction startup is more common than ever.

Recently, I have had the pleasure of assisting a number of small startup businesses. Small businesses are very alike at their core, requiring structure, planning, compliance and financial management. Construction firms are no different and require consistent capital for growth through equipment investments, new service offerings and staffing.

The construction industry has, for a long time, been defined by consistency and age. Older and more experienced contractors survive well, and continue to grow through their own profits. But, these days we require new and different types of builders. We need contractors willing to change the way we think about our energy systems, modern design, sustainability and even technology. From this has grown a niche space for a number of new contracting businesses.

What is very exciting to me is that some of these enterprising contractors are willing to approach the funding and formation of their business much like a technology or software startup might. Software startups have, for a long time, relied on pools of up-front funding, from hefty numbers of investors, with little more than ideas to serve as investor security. Why can’t contractors capitalize on this same mentality? They can.

With the passage of the JOBS Act, I expect to see more and more upstart contractors on Kickstarter.com and the newly-formed Crowdfunder.com. The JOBS Act enables these types of web services to help your business market itself to vast pools of potential investors, contributors and fundraisers. The potential for use of these services to boost growth in new construction firms is great.

The JOBS Act came around to solve a big problem for small business financing – the restrictions set forth by the Securities Act. Under SEC regulations, many offerings of ownership interests must be registered and follow strict protocols. If you can qualify as a smaller offering, you might gain an exemption under Regulation D to the Act, but unfortunately that means that you are likely limited to obtaining funding from wealthy individuals known as “Accredited Investors,” while still being strapped with significant regulation.

The JOBS Act strips regulatory constraints for qualifying offers. In sum, the Act allows businesses to raise up to $1 Million per year through SEC-approved “crowdfunding” sites. The Act further enables persons who would not qualify as an “Accredited Investor” to invest in your company. Investors with a net worth of less than $100,000 may now invest 5% of their yearly income or $2,000, whichever is higher. Some wealthy investor can invest up to 10% of their income.

Check out this link to review eight of the “crowdfunding” sites that are likely to gain SEC approval in the near future. I sincerely hope to see more entrepreneurs show interest in the construction industry, now that capital is more accessible.