Author Archives: Melissa Dewey Brumback

Contractors liable to other prime contractors on state construction projects in North Carolina (Law note)

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As we discussed in the last blog post, the state legislature created the multi-prime system for many state construction projects.

One of the first cases to deal with the statute allowing contractors to sue each other is Bolton Corp. v. T.A. Loving  Co., 94 N.C. App. 392, 380 S.E.2d 796, disc. rev. denied, 325 N.C. 545, 385 S.E.2d 496 (1989). 

In that case, which involved the construction of an 8 story library on the UNC-CH campus,  a HVAC prime contractor, Bolton, sued the project expeditor, TA Loving, for Loving’s breach of its contract with the State.  Bolton brought the claim on both its own behalf and on behalf of its subcontractor.

 The court allowed the suit, not based on tort, but based on the multi-prime statute (N.C. Gen. Stat. §143-128).   The court held that a prime contract can be sued directly by another prime contractor working on a state construction project:

We interpret N.C.G.S. § 143-128 to mean that a prime contractor may be sued by another prime contractor working on a construction project for economic loss foreseeably resulting from the first prime contractor’s failure to fully perform “all duties and obligations due respectively under the terms of the separate contracts.”

In my next post, I will discuss the application of this concept to design professionals.

 

NC State Construction projects– Privity, Multi-Prime Contracts, and the Ability to Be Sued by Parties You Don’t know (Law note)

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At the recent seminar on construction law in North Carolina, I was asked whether parties could be sued by other parties on state construction projects when there is no contract between those parties.  The answer is yes. In the following series of blog posts, I will address three major cases which address this question in several different permutations.

For today’s post, I will discuss contractual privity, the multi-prime statute, and how the two apply on North Carolina state construction projects.  In later posts, I will discuss the application of that statute to different parties in the construction context.

Multi-prime contracts

In North Carolina, the state entity who is the owner of the construction project must bid the project pursuant to one of several designated ways.  One common method sometimes required of public bidding is the “mulit-prime” contract, in which the State has at least 4 separate contracts, for:

(1) Heating, ventilating, and air conditioning

(2) Plumbing and gas fittings

(3) Electrical wiring and installations

(4) General construction relating to erection, alteration, or repair on public property

N.C. Gen. Stat. §143-128(a). 

The purpose of the multi-prime statute is two-fold:

  1.  It encourages lower bids by preventing pass-through cost mark-ups to the state
  2. It allows smaller specialty contractors to enter bidding directly with state without having to have a working relationship with a general contractor, thereby opening up state jobs to a wider array of potential contractors
Contractual Privity

 In general, contractual privity is required to sue another entity on a construction project—that is, you have to be in a contractual relationship with the party you are suing.  There are exceptions to this rule.  For example, you can be sued in negligence for property and personal damage by a party that you do not have a contract with.  (See my post discussing the architect’s liability for economic loss  resulting from breach of architect’s common-law duty of due care  ).  In addition, the state legislature has provided the ability for contractors to sue one another, or other entities involved in the construction project, without having to sue the owner or deal with the State Construction Office.

 NC statute on liability:

Each separate contractor shall be directly liable to the State of North Carolina, or to the county, municipality, or other public body and to the other separate contractors for the full performance of all duties and obligations due respectively under the terms of the separate contracts and in accordance with the plans and specifications, which shall specifically set forth the duties and obligations of each separate contractor. For the purpose of this section, “separate contractor” means any person, firm or corporation who shall enter into a contract with the State, or with any county, municipality, or other public entity to erect, construct, alter or repair any building or buildings, or parts of any building or buildings.

N.C. Gen. Stat. §143-128(b).   [Emphasis added].

This statute has been interpreted over the past decade to allow essentially any party to sue any other party directly on state construction projects.  In the next blog post, I will discuss the first of three major cases dealing with this issue.

No more Liens when a General Contractor is in Bankruptcy—the new North Carolina law?

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Unfortunately, bankruptcy is an all too common occurrence in today’s economy.  Companies which have been stalwarts of the construction industry are falling like dominos and entering into the protective waters of bankruptcy.  What effect does a bankruptcy filing have on your ability to file or perfect a lien?  A lot.

Until very recently, the general practice in North Carolina was that even if the general contractor was in bankruptcy, a subcontractor could still proceed with a lien on real property to the extent funds remained due and owing from the property owner.  It was common practice for subcontractors to serve a notice of claim of lien on funds and claim of lien on real property to the property owner even if the general contractor had filed bankruptcy, and no bankruptcy court approval was needed.

Recently, however, three cases in the Eastern District of North Carolina Bankruptcy Court (which extends from Raleigh to the Coast) have ended this practice and called into doubt whether any lien right can be preserved after the general contractor files bankruptcy.  The three cases are In re Shearin Family Investments, LLC, Case No. 08-07082080-JRL (Bankr. EDNC April 17, 2009); In re Harrelson Utilities, Inc., Case No. 09-025815-8-ATS (Bankr. EDNC July 30, 2009); and In re Mammoth Grading, Inc., Case No. 09-01286-8-ATS (Bankr. EDNC July 31, 2009).

In these cases, the Courts have held that no lien arises until it is perfected; therefore, if the notice of a lien on funds is not served prior to the bankruptcy filing, it is disallowed and the subcontractor (or supplier) will be treated as an unsecured creditor in the bankruptcy.  The Harrelson and Mammoth cases are on appeal, and the issue currently only concerns the Eastern District, although the Middle and Western Districts would likely treat those opinions with deference.

If these decisions stand, and become the new law of the land, then contractors and material suppliers must remain extra vigilant about account receivables and in pursuing lien rights if any sign of financial insecurity is suspected in the general contractor.

A detailed discussion of the facts of these three cases and each of their legal holdings can be found in article “To Assert or Not to Assert? Can Contractors Afford to Wait to assert Their Lien Rights”  (by Wayne Maiorano, Amos Priester, and Anna Osterhout), which first appeared in the October 2009 issue of the North Carolina Bar Association‘s  Construction Law Section newsletter, The Change Order.

 

How Long Should My Construction Contract Be?

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The answer, as is always the answer when you ask an attorney a question, is “it depends.”  Lawyers don’t say “it depends” just to drive clients mad—really, we don’t.  The thing is, lawyers, by their very nature, are cautious.

Lawyers want to plan for all situations and possibilities.  Likewise, a construction contract can become an unwieldy document that only a lawyer could love, as it provides for all conceivable areas of dispute and all possible contingent situations.  Such a contract does no one much good.

The best contract for you is the contract that is appropriate for your construction project and the players in that project.  If the project is a multi-million dollar, multi-year project, you probably should not skimp on having a well-crafted, attorney-vetted contract specific to your deal.  If, on the other hand, the project is a one-day residential job, you can get by on much less.

Do not assume, however, that just because a contract is small in terms of dollars or man-hours that you do not need a contract. You do. (See my earlier post on the importance of a written contract.) Paradoxically, some of the most hotly contested lawsuits involve homeowners.  After all, their home is their castle.

In fact, a house is usually the single largest investment decision that most people will ever make, often involving a mortgage that may take as many as 30 years to pay off.     It is only natural, therefore, that homeowners will be extra exacting when it comes to issues relating to their home.

To go back to the original question—how much contract you need depends very much on the situation.  A two page, simple contract may be sufficient for your purposes, if it is carefully crafted to account for all common areas of dispute which may arise.  It is vital, however, that you have one, and that it is in writing.

Primary Elections Tomorrow– Voter Guide Info

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A friendly Public Service Announcement:  North Carolina’s Primary Elections are tomorrow, Tuesday May 6th, 2010.

If you aren’t sure who is on your ballot, check out the non-partisan guide from the NC Center for Voter Education.

There are several judicial races in tomorrow’s election, and these often get overlooked by non-lawyers.  Please don’t overlook  these elections, as they are important and, with the typical low voter turn out expected, your vote very well could be a deciding factor.