2014 – Page 2 – Construction Law

Pennsylvania Supreme Court Rules that Subsequent Homeowners Are Not Entitled to Implied Warranty of Habitability

Sep 19 2014

By Christopher A. Barbarisi and Loly G. Tor, K&L Gates, Newark

In Conway v. Cutler Group Inc.,[1] the Pennsylvania Supreme Court reversed a decision by the Superior Court and held that the builders’ implied warranty of habitability does not run to subsequent purchasers of homes, significantly limiting homebuilders’ potential liability to subsequent owners.

In Conway, the homeowners, Michael and Deborah Conway, purchased a three-year-old home from the original owners, who had purchased the home new from the builder. After allegedly discovering water infiltration and construction defects in the home, the Conways filed suit against the builder for breach of the homebuilders’ implied warranty of habitability. The trial court dismissed the Conways’ complaint, finding that the Conways’ claim for breach of the implied warranty was barred due to lack of privity. On appeal, the Superior Court reversed, finding that the implied warranty of habitability should exist independently of a contract between the builder and homeowner because the warranty is based on public policy considerations, is designed to “equalize the disparate positions” of the builder and homeowner, and exists independently of any builder representations.

In reversing the Superior Court, the Pennsylvania Supreme Court considered the history of the implied warranty of habitability and its adoption by the Court in Elderkin v. Gaster.[2] In Elderkin, the Court rejected the doctrine of caveat emptor and instead placed the burden of risk on a builder “‘that a home which he has built will be functional and inhabitable in accordance with contemporary community standards.’”[3] The Court also recognized that the implied warranty in Elderkin was based on the existence of a contract between the builder and the homeowner (which, of course, does not exist with a subsequent purchaser) and was limited to situations where the parties are not in privity. After discussing the varying decisions reached by courts in other jurisdictions on this issue, the Court declined to depart from its position that the implied warranty of habitability is grounded in contract and requires privity between the parties to be enforced. It concluded that whether to extend the warranty of habitability to subsequent homeowners is a question of public policy properly left to the legislature. Thus, unless and until Pennsylvania’s General Assembly decides otherwise, an action for breach of implied warranty of habitability requires contractual privity between the parties, eliminating a potential source of liability to homebuilders.

[1] J-41-2014 (Pa. Aug. 18, 2014).
[2] 288 A.2d 771 (Pa. 1972).
[3] J-41-2014 at *4 (quoting Elderkin, 288 A.2d at 777).

Biggest Risk of Corruption in The Construction Industry: The Global Picture

Sep 18 2014

By Elizabeth Robertson, Laura Atherton and Dylan G. Moses, K&L Gates, London

The construction industry is big business. A recent study[1] has predicted that global construction output will increase by more than 70%, to US$15 trillion per year worldwide, by 2025. The dominant sources of this growth will be three countries in particular, China, India and the U.S., with much of the remainder in the emerging markets.

This growth is a cause for celebration, but it will not come without challenges[2]. Some of those countries where the highest growth is predicted are also perceived as having the highest levels of corruption[3].

To read the full Whitepaper, click here.

1 The Global Construction 2025 by Global Perspectives and Oxford Economics.

2 The Chartered Institute of Buildings found that 49% of respondents to a 2013 survey thought that corruption was common within the UK construction industry.

3 China is listed at number 80 and India is listed at number 94 out 177 countries ranked by Transparency International on their corruption perceptions index in 2013.

Issues to Consider When Doing Business in Qatar

Sep 04 2014

As part of K&L Gates’ commitment to continuing professional development, the construction and disputes resolution lawyers in our Doha office regularly discuss relevant legal issues that arise while advising clients in Qatar, giving presentations about issues with Qatar law and lessons learned from live matters.

The attached slides features a presentation by Alex Brightman about issues to consider relating to the registration of the local branch of an international construction company who wants to do business in Qatar.

To view the presentation, click here.

Changes Made to the Pennsylvania Mechanics’ Lien Law to Protect Holders of Open-End Mortgages and Residential Property Owners

Jul 31 2014

By Raymond P. Pepe, K&L Gates, Harrisburg

Mechanics’ liens grant contractors and subcontractors an interest in improvements made to real property to secure the payment obligations of owners to contractors, and of contractors to subcontractors. While these liens protect the legitimate interests of contractors and subcontractors, if mechanics’ liens impair access to credit needed to finance construction and expose homeowners to financial risks beyond their reasonable and legitimate expectations, mechanics’ liens may impede new construction in a manner clearly contrary to the interests of the contractors and subcontractors whose rights they seek to protect. Newly enacted Pennsylvania legislation attempts to better balance the interests of construction lenders, contractors, subcontractors and property owners.

The legislation clarifies and expands the extent to which mechanics’ liens are subordinate to open-end mortgage used to finance construction and protects the owners of certain types of residential properties from claims by subcontractors when amounts due have been paid to general contractors.

To read the full alert, click here.

The Perennial Question of Concurrent Delay – The English Viewpoint

Jul 30 2014

By Mike R. Stewart and Mary E. Lindsay, K&L Gates, London

Concurrent delay remains a perennial issue in construction contracts and the disputes arising out of those contracts. The classic situation of “concurrent delay” occurs when both a contractor and the employer allege that the other is causing delay, where the delay caused by each impacts the project at the same time.The key authorities on the topic remain the same, in our view (all emphasis added).

“MINT” Countries Focus in Arbitration World – July 2014

Jul 24 2014

Welcome to the 27th edition of Arbitration World, a publication from K&L Gates’ International Arbitration Group that highlights significant developments and issues in international and domestic arbitration for executives and in-house counsel with responsibility for dispute resolution.

To view Arbitration World, click here.

To download a printable PDF of the publication, open the link above and click on the fourth icon from the right in the magazine toolbar at the top of the page.

In this edition, we include articles specifically relevant to the “MINT” countries of Mexico, Indonesia, Nigeria and Turkey, tipped as the next economic giants by ex-Goldman Sachs economist Jim O’Neill who coined the term “BRIC ” countries back in 2001. We look at energy reform in Mexico and its potential impact on commercial and investor-state dispute resolution and a recent decision regarding threshold jurisdictional requirements applicable to bilateral investment treaty (BIT) claims, with particular reference to Indonesia. We review some recent decisions of the Nigerian courts which offer support for arbitration, and current trends and future prospects for arbitration in Turkey.

More generally, we survey the tricky issues that can arise with respect to corruption and bribery in international arbitration. We examine the recent ruling by the Supreme Court of India in the Enercon India case and its implications on the drafting of arbitration agreements. We report on a recent case from Texas regarding the implications of allowing the deadline for rendering an arbitration award to pass. We also provide our usual update on developments from around the globe in international arbitration and investment treaty arbitration.

We hope you find this edition of Arbitration World of interest and we welcome any feedback (e-mail ian.meredith@klgates.com or peter.morton@klgates.com).

“2 Sign or Not 2 Sign:” Which Statute of Frauds Governs Oil & Gas Leases?

Jul 16 2014

By George A. Bibikos, K&L Gates, Harrisburg and David I. Kelch, K&L Gates, Pittsburgh

In a recent decision, the Pennsylvania Superior Court resolved an open question of state law regarding which one of two alternative statutes of frauds apply to oil and gas leases, in the process making clear that for an oil and gas lease, only the grantor of the interest must sign.

To read the full alert, click here.

No License? No Problem. The Ninth Circuit Holds That Unlicensed Contractors May Maintain Claims For Compensation Under The Miller Act

Jul 02 2014

By Heather W. Habes and Tyler J. Cesar, K&L Gates, Los Angeles

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.

New LEED Credential Exams Test Skills and Sustainability

Jul 01 2014

By Alexander M. Moss and Jesse G. Shallcross, K&L Gates, Chicago

Starting June 30, 2014, the updated LEED credential exams become available for practitioners who want to demonstrate their competency in green building principles and practices. The new exams incorporate LEED v4 content for the first time, which the U.S. Green Building Council (USGBC) released last fall. See Erin Emery Hartz, LEED v4 credential exams coming June 2014, USGBC (Feb. 7, 2014). Specifically, the LEED Green Associate exam and LEED AP specialty exams feature the new rating system. See id. Several important changes to these exams reflect the growth of green building construction and development in the last several years, especially in Illinois.

The LEED AP certifications are designed for professionals who are working on LEED projects and have acquired expertise in green building and sustainability. See id. Originally, the AP exams did not evaluate LEED project experience within the exam itself. See id. Under the new format, exam questions will require proficiency in cognitive areas as well as particular skills involved in LEED processes. See id. For example, it is not enough for the candidate to simply know what LEED Online is, but rather he or she must know how to use it too. See How is project experience assessed within the LEED AP exam?, USGBC, Notably, because the AP exams will now inherently evaluate experiential knowledge, the requirement to submit proof of LEED project experience at the time of the application is no longer necessary. Hartz, supra. However, the Green Building Certification Institute still encourages applicants to gain project experience in order to be successful on the skills-based portions of the exams. Id.

The exams will reflect LEED v4’s heightened focus on the lasting impacts of new buildings on the environment. One significant change under LEED v4 is the enhanced Materials and Resources category. LEED MR now includes credits for product optimization and disclosure as well as assessments of the structure’s life cycle in terms of climate change and nonrenewable energy sources. See Theresa Lehman, LEED Credential Exams to Feature v4 Material, Constructor Mag. (Mar. 26, 2014). Furthermore, the Indoor Environmental Quality credits will now include a low-emitting material credit that requires more sophisticated testing and monitoring procedures. See id. Overall, the LEED v4 changes align with the contemporary push for more sustainable and environmentally friendly human development.

As of September 2013, Illinois had the fourth-largest number of LEED-accredited professionals in the United States at 4,688 total credentials held. LEED Professionals at a Glance: September 2013, USGBC (Sep. 23, 2013). In February 2014, the USGBC revealed the top 10 states in the United States for LEED green building, and Illinois ranked first with over 29 million square feet certified, or 2.9 square feet certified per resident. Jacob Kriss, USGBC Releases the Top 10 States in Nation for LEED Green Building, USGBC (Feb. 18, 2014). Illinois ranked third in the top 10 in the number of buildings LEED-certified last year at 171. Id. Only California (595) and New York (259) had more LEED projects. Id. Some of the top LEED projects in Illinois included the Holocaust Museum in Skokie, a 57-story tower on LaSalle Street in Chicago, the Caterpillar Visitors Center in Peoria, and Lincoln Hall at the University of Illinois at Urbana-Champaign. Illinois Leads Nation in “Green” Buildings, NBC CHICAGO (Feb. 19, 2014, 12:15 PM).

The demand for LEED-certified buildings in Illinois and the rest of the United States creates an incentive for construction industry professionals to consider becoming LEED accredited. It remains to be seen whether the new version requirements and exam content will significantly impact the number of new applicants seeking certification. For those who do decide to take the tests, the LEED v4 credentials can be one effective way to express a commitment to green building practices in the 21st century.

No Compensation for Clandestine Employment in Germany!

Jun 30 2014

By Christoph Mank and Kristina Fischer, K&L Gates, Berlin

In Germany, it is prohibited by law to hire clandestine workers. But what happens if a principal nevertheless hires a clandestine worker and does not pay the agreed compensation? Is the clandestine worker entitled to claim his compensation before court? In a recent judgment dated 10 April 2014, the German Federal Court of Justice (“Bundesgerichtshof“) said “no“ and decided that clandestine employment must not be compensated.

The defendant was building serial houses; the plaintiff was instructed by the defendant to do electrical installations. As compensation, plaintiff and defendant had agreed that the defendant would pay a lump-sum of EUR 13,800 including VAT and another EUR 5,000 cash and without invoice. From the agreed amount of EUR 5,000, the defendant had paid EUR 2,300 but refused to pay the remaining EUR 2,700. The claim with which the plaintiff (inter alia) requested payment of these EUR 2,700 was, however, dismissed:

The agreement between the parties, obliging the defendant to pay the cash amount of EUR 5,000, is null and void. According to Section 134 of the German Civil Code, an agreement which violates a statutory prohibition is void, unless the statute leads to a different conclusion. In this case, the parties´ understanding has violated Section 1 no. 2 (2) of the German Act to Combat Clandestine Employment (“Schwarzarbeitsbekämp-fungsgesetz“), which classifies as clandestine employment the nonfulfilment of statutory tax liabilities. According to the Court, it was evident that the parties´ agreement to provide works without an invoice was meant to conceal the plaintiff´s turnovers from German tax authorities and to provide a price advantage for the defendant. Even if the „cash understanding“ referred to only a part of the agreement, the violation of Section 1 no. 2 (2) of the Act leads to a nullity of the entire agreement. As a consequence, the clandestine worker was not able to claim the agreed compensation from the principal.

What makes the decision of the German Federal Court of Justice particular? In a former decision of 1990, the Court had decided that although the agreement between principal and contractor was violating the (former) Law on Clandestine Employment the contractor was nevertheless entitled to claim restitution according to the value of his work. The Court argued that the principal who mostly is the economically stronger party, would otherwise be in unjust advantage if he was allowed to keep the clandestine worker´s performance without any consideration. Since 1990, the Laws on Clandestine Employment have tightened. Accordingly, in 2013, the Court heralded a change of its case law and ruled that a principal has no warranty claims against a clandestine worker, if the worker´s performance was poor, inadequate or insufficient. With its 2014 decision, the Court emphasized the importance to enforce the Laws on Clandestine Employment effectively: A person who deliberately violates the Law does not deserve to be protected by civil law. By denying the principal´s warranty claims on the one hand and the clandestine worker´s claim for compensation on the other hand, parties shall be restrained from concluding a prohibited clandestine agreement. Whether or not this judgment will have the expected deterrent effect on clandestine contractors and principals remains to be seen.

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