Contractors May Benefit by Taking Equity in the Project They are Constructing

Contractors may benefit in making a small equity investment in the projects they construct. The financial benefit can arise from the investment itself and from improved understanding and communication with the owner during construction itself.

In the past, it was not unusual for construction companies to make small equity investments in the projects they worked on. For example, a construction company building a power plant would take a 5% equity interest in the project. By taking a financial stake in the project, contractors planned to protect their business interest in the project. That was the theory, anyway. Many of these investments did not provide the good returns; often-times the return was negative. While the construction company’s management was great at operating the construction business, it was not so great when it came to the financing business. So the idea went out of fashion. Continue Reading

Picerne Construction Corp. v. Castellino Villas (Feb. 18, 2016, C071197)

By Joy O. Siu on January 23, 2017 Posted in Recent Cases

The Third District Court of Appeal recently held that completion under the mechanics lien statute requires actual completion of the work of improvement, meaning completion of the entire structure or scheme of improvement as a whole, in Picerne Construction Corp. v. Castellino Villas (Feb. 18, 2016, C071197).* In doing so, the Court resolved an ambiguity developed through case law by acknowledging the abrogation of authority that permitted completion to be found where only “trivial imperfections” to the work of improvement remained.

AB 1793 Amends Requirements for Contractors to Establish Substantial Compliance With State Contractor Licensing Requirements

By Robert Sturgeon on September 7, 2016 Posted in New Rules and Regulations

On August 30, 2016, Governor Brown signed into law AB 1793, which amends the requirements under Business & Professions Code § 7031 for a contractor to establish “substantial compliance” with state contractor licensing requirements. AB 1793 amends section 7031 by deleting the requirement that to establish substantial compliance, a contractor must show it did not know and reasonably should not have known that it was not licensed at the time it began performing the construction work or contract at issue. The amendments are to become effective January 1, 2017.

Revised Construction Industry Arbitration Rules Adopted by American Arbitration Association

By Sheppard Mullin on July 13, 2015 Posted in Arbitration and Mediation, Construction Claims and Litigation

The American Arbitration Association (“AAA”) issued revised Construction Industry Arbitration Rules which took effect July 1, 2015. There are significant changes in the new rules which are intended to make the arbitration process more efficient and cost-effective. The changes include several completely new rules which provide expanded authority to the arbitrator to control the course of the arbitration. For example, the new rules provide: Continue Reading

Second-Lowest Bidder for Public Contracts May Sue Lowest Bidder Who Paid Less Than Prevailing Wages

By Amanda Beckwith on June 2, 2015 Posted in Employment and Prevailing Wage

Public agencies have little, if any, discretion when awarding public contracts because they are required to award the contract to the lowest bidder, subject to certain minimum qualifications. These limitations are designed to protect the public and its financial interests, not the bidders. Losing bidders typically can contest the award only by challenging the bid itself via bid protest, or the bidding process. Continue Reading

Principal Architects on Residential Projects Liable for Construction Defects Outside Their Control; Developers and Owners May Pay the Price

By Sheppard Mullin on July 16, 2014 Posted in Construction Claims and Litigation, Design and Construction Defects

Beacon Residential Community Assoc. v. Skidmore, Owings & Merrill, LLP (Cal. Supreme Court., 07/03/2014, S208173)

On July 3, 2014, the California Supreme Court decided the much watched case Beacon Residential Community Assoc. v. Skidmore, Owings & Merrill, LLP. The court held that the “principal architect” “owes a duty of care to future homeowners in the design of a residential building . . . even when they do not actually build the project or exercise control over construction.” (Emph. added.)

New California Statutes Potentially Increase Contractors’ and Subcontractors’ Liability Exposure Under the Prevailing Wage Law

By Hal Hamersmith, Robert Sturgeon and David Chidlaw on December 16, 2013 Posted in Employment and Prevailing Wage

California has enacted several statues, effective January 1, 2014, which will likely increase contractors’ and subcontractors’ exposure to claims for prevailing wage violations on public works projects. Under the Prevailing Wage Law, Cal. Labor Code § 1720 et seq., contractors and subcontractors working on public works are required to pay the wages prevailing in the locality, and to comply with several record-keeping and employee work schedule requirements. Violations of the law subject a contractor or subcontractor to claims for unpaid prevailing wages, and a variety of assessments and penalties. The recently-enacted California statutory provisions increase the time period in which the claims for violations of the Prevailing Wage Law may be brought, increase the scope of remedies available to private entities seeking to enforce the Prevailing Wage Law, establish deadlines for the Director of the Department of Industrial Relations to issue coverage determinations as to whether a project qualifies as a public work under the Law, and generally increase the risk of liability under the Law.

A Construction Defect Insurance Carrier Need Only Demonstrate That Another Insurance Carrier’s Policy May Potentially Cover The Claim In Order To Recover Equitable Contribution To A Settlement

By Sheppard Mullin on August 22, 2013 Posted in Construction Claims and Litigation

A California Appellate Court recently clarified the burden of proof for an insurance company seeking contribution from another insurance company in settlement of a construction defect action. When a company involved in construction is sued for allegedly causing property damage to the building or structure it built (i.e. a construction defect), the company typically turns to its commercial general liability insurance policy. Depending on the nature of the defect claim the construction company may have more than one policy that could potentially provide coverage. Different insurance carriers may respond to their insured’s tender in different ways. When one carrier agrees to defend and indemnify its insured from a claim potentially covered by another carrier, but the second carrier refuses to cover, the first might settle the claim and then seek a court ruling that the second provide “equitable contribution” to the settlement amount paid. In that situation, what does the settling carrier have to show? That the claim was absolutely and certainly with in the coverage of the second insurance policy?

New Court Decision Clarifies Mechanic’s Lien Valuation Statute

By Sheppard Mullin on April 16, 2013 Posted in Construction Claims and Litigation, Mechanic's Liens, Bonds and Stop Notices

The amount of a mechanic’s lien in California is generally the lesser of: 1) the reasonable value of the work; or 2) the price agreed upon in the lien claimant’s contract. But does the same measure apply if a lien defendant was not a party to the contract? In Appel v. Superior Court of Los Angeles County, 214 Cal. App. 4th 329 (2013), the appellate court clarified that the same measure does apply.

Knowingly Underbidding For Government Contract May Lead to False Claims Liability

By Robert Sturgeon on December 27, 2012 Posted in False Claims

Contractors usually assume that the statutory prohibition on submitting “false claims” refers to inflated invoices, phony change order costs, and the like. However the courts are giving the relevant statutes a broader meaning which public works contractors should take into account. For example, the United States Ninth Circuit Court of Appeals recently ruled that a bidder for a government contract that is found to have knowingly underbid the contract may have liability under the federal False Claims Act (“FCA”). In Hooper v. Lockheed Martin Corporation, 688 F.3d 1037 (9th Cir. 2012), Lockheed was the successful bidder for a contract with the Air Force to automate and modernize software and hardware used to support U.S. space launch operations. The contract was structured as a reimbursable cost plus “award fee” contract, where the contractor would be paid its costs of performing the work, plus “award fees” given at periodic intervals based on overall performance, including factors such as “spending less money than estimated.” Id. at 1041. Because the extent of the work required was uncertain, bidders were to submit their estimated costs of performing the work. Lockheed initially submitted a bid of $439.2 million, and later submitted a “Best and Final Offer” of $432.7 million. Id. at 1042. After the award, the government paid Lockheed more than $900 million for its work.

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