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Public and private construction projects are different in many respects, however chief among those differences is the party that owns the property subject to the contract.  In other words, when contractors enter into a contractor with a municipality (County, City, State, agency, etc.) any subcontractors, material suppliers, laborers, or mechanics to that project are at a disadvantage.  Why, you ask?  Because unlike private property, the law prohibits subcontractors, material suppliers, laborers, and mechanics from recording liens on public property.

This is important because these second-tier contract participants are therefore unable to protect themselves should the general contractor refuse to pay them for their services.  Unfortunetly, this puts them in an impossible position, as they cannot gain payment through a lien on public property, but there is often little to no amount left in the general contractor's construction bond that would satisfy what these subcontractors are owed. 

In response to this issue, Washington State enacted RCW 39.08, a statute which extends certain protections to subcontractors, laborers, material suppliers, and mechanics who do work for a general contractor on a public project.  Here is what it does:

RCW 39.08.10 -- Municipalities must require that general contractors to public projects have a "good and sufficient bond."  This bond is to be filed with the clerk or comptroller and is intended to stand as a surety in case the general neglects payment to all "laborers, mechanics, and subcontractors and material suppliers..."

RCW 39.08.15 -- If the bond is not present, or is insufficient, then the municipality becomes "liable to the [laborers, mechanics, and subcontractors and material suppliers] to the full extent and for the full amount of all such debts so contracted by such contractor."

The case law supports these protections --

Puget Sound Elec. Workers Health and Welfare Trust Fund v. Merit, 123 Wash. 2d 565, 870 P.2d 960 (1994) states that public works lien statutes require general contractors on public projects execute and deliver a bond to the public agency in order to protect all laborers, mechanics, subcontractors, and material suppliers performing the contract work.

National Sur. Co. v. Bratnober Lumber Co., 67 Wash. 601, 122 P. 337 (1912) states that statutory requirements for contractors on municipal improvements give bonds for payment of laborers and materialmen in order to secure claims not protected by lien laws.

Smith v. Town of Tukwila, 118 Wash. 266, 203 P. 369 (1922) also states that if the bond does not meet the statutory requirements, then it is insufficient and not a statutory bond (which by implication would satisfy the requirements outlined in RCW 39.08).

In short, if you are a subcontractor, laborer, material supplier, or mechanic doing work on a public job, and the general contractor refuses to pay your invoices, look to the contractor's bond.  If it is insufficient, then you may have a claim against the city/county/state is paying for the project. 

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If you are ever involved in property development, a liquidated damages clause is something you ought to be familiar with.  What is a "liquidated damage"?  It is basically an amount of damage that contracting parties agree to during the formation of the contract, which is applied if the agreement is breached.  In other words, rather than the parties trying to calculate damages after a breach happens, they pre-determine the damage amounts.

These clauses are usually favored and often upheld in Washington State.  Ashley v. Lance, 80 Wash. 2d 274, 280, 493 P. 2d 1242, 62 A.L.R. 3d 962 (1972).  To determine whether they are enforceable, Washington courts generally require the following two factors to be satisfied:

(1) Liquidated damage must be reasonable (just compensation for the harm caused by the breach);

(2) It must be very difficult or impossible to determine the harm beforehand.

Walter Implement, Inc. v. Focht, 107 Wash. 2d 553, 559 (1987). 

A liquidated damages clause will NOT be upheld if it is show that the provision is simply a penalty or is otherwise unlawful.  Jenson v. Richens, 74 Wash.2d 41, 47, 442 P.2d 636 (1968). 

In short, parties can pre-set what a contract breach will cost the breaching party.  This allows for a clear assessment of damages, provided that it is not a penalty.  The liquidated damages must not only be reasonable when compared to the harm of the breach, but the harm caused must be difficult or impossible to ascertain. 

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 In a recent summary judgment motion, the main topic at issue was whether the famed Mike M. Johnson case applied (Mike M. Johnson v. County of Spokane, 150 Wn.2d 375, 78 P.3d 161 (2003)).  As many will recall, Mike M. Johnson ("MMJ") states that contract provisions are enforceable unless waived by the provision's benefit ting party.  This waiver can be implied through conduct or actions, however, if it is so implied, the conduct/action must be unequivocal for waiver to be valid.  MMJ dealt specifically with a contract provision regarding the procedure by which a contractor could receive compensation for changes in the contract (or "change orders").  

The contract owner in MMJ at almost every turn notified (often in writing) the contractor that if it wanted additional consideration for changes in the contract, it must satisfy the requirements for change orders and turn in specific documentation and information to the owner.  MMJ failed to do so.  The court held that even though the contract owner had actual knowledge of the changed circumstances, this wasn't enough.  It would have to do more to waive other than simply having actual notice of the changes.

So, the big question remains: if MMJ wasn't waiver, what does waiver look like?  I believe that MMJ and another case called American Safety Cas. Ins. Co. v. City of Olympia, 133 Wn.App. 649, 137 P.3d 865 (2006) give us a hint: 

In MMJ, the court analyzed an assertion by the plaintiff which said that because the county had actual knowledge of the changed circumstances, that it therefore couldn't deny compensation for mere failure to follow the details of the contract.  The court disagreed:

"MMJ argued to the Court of Appeals, and maintains before this court, that when an owner has actual notice of a contractor's protest or claim, that notice, in and of itself, excuses the contractor from complying with mandatory contractual protest and claim procedures.  MMJ contends that the decision of Bignold v. King County, 65 Wn.2d 817, 822, 399 P.2d 611 (1965) establishes the 'actual notice' exception . . . [c]ontrary to MMJ's contention, the Court of Appeals in Bignold did not hold that the owner's actual notice of the changed condition in and of itself excused the contractor from complying with the contractual notice provisions.  Rather it was the owner's knowledge of the changed conditions coupled with the subsequent direction to proceed with the extra work that evidenced its intent to waive enforcement of the written notice requirements under the contract."  Id. at 388-89

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John Parnass of Davis Wright Tremaine, LLP maintains an informative and well-researched blog called the Washington Construction Law blog. 

Given that construction and real estate are often joined at the hip on legal matters, it would be a great idea for people interested in real estate to monitor the latest construction law developments on John’s blog. 

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