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How to secure attorney’s fees on a contractor’s bond

ConstructioWorkerWhenever you find yourself dealing with a contractor, you will also find yourself dealing with that contractor’s bond almost without exception.  Under Washington statute Title 18, general contractors and subcontractors alike are required to file evidence of a surety bond with the Department of Labor and Industries of Washington State.  RCW 18.27.040 (general contractor bond must be in the amount of $12,000 and a subcontractor or “specialty” contractor bond must be in the amount of $6,000).  The statute’s purpose is “to afford protection to the public including all persons, firms and corporations furnishing labor, materials, or equipment to a contractor from unreliable, fraudulent, financially irresponsible, or incompetent contractors.”  RCW 18.27.140.  It is a misdemeanor for a contractor to work without first being registered pursuant to the statute.  RCW 18.27.020(2)(a).

The mandatory contractor’s bond requirement is important to potential litigants because any person who may file a claim against the contractor is also permitted to specifically name the surety bond as a party to the suit.  Of course, naming the bond involves particular pleading requirements in order to comply with the statute.  When done right this statute can secure you an increasingly rare award as part of the recovery: YOUR ATTORNEYS’ FEES!!  See RCW 18.27.040(6).  Such statutes are quite in the opposite of the general rule that each party in a civil action is responsible for paying its own attorneys’ fees and costs.  In re Impoundment of Chevrolet Truck, 148 Wn.2d 145, 160, 60 P.3d 53 (2002) (commonly referred to as the “American rule”).  In an effort to put some teeth in the statute, Washington legislators expressly included that attorneys’ fees were a possible award to bona fide litigants.

However, the statute has been subject to some scrutiny in recent caselaw from several levels of the State’s judiciary in recent months.  The contractor’s registration statute was thoroughly examined in Cosmopolitan Engin. Group, Inc. v. Ondeo Degremont, Inc., 159 Wn.2d 292, 149 P.3d 666 (2006).  In that case, one litigant claimed that the contractor’s bond statute allowed the prevailing party to recover its attorneys’ fees from both the contractor and the surety bond itself.  Id. at 298.  In undertaking its statutory interpretation of RCW 18.27.040, the Court deduced that the placement of the attorneys’ fee provision, when considering the statutory scheme in its entirety, refers “only to action for recovery against the contractor’s bond.  Id. at 299.  Hence, the Court limited recovery of attorneys’ fees under this section to the amount of the contractor’s bond due to its precise placement in the contractor’s bond statute.  In apparent dicta, the Court further rationalized its decision based on the legislatures’ failure to expressly identify that attorneys’ fees were available in suit “against the contractor or against the contractor’s bond” independently of one another.  Id. at 301.  The court’s reasoning makes sense due to the fact that a litigant could not sue a contractor’s bond under the statute without first initiating a claim against the contractor for breach of contract.  The Cosmopolitan decision and its authority for limiting an attorney fee award specifically to the amount of the bond was reaffirmed as recently as last December in an appellate decision from Division Three.  See Brotherton v. Kralman Steel Structures, Inc., 2011 WL 6822261, *5-9 (Div. 3 2011).  Thus, the prospect of pursuing fees from the contractor party seems to be quite settled without much room to argue the alternative.

Cosmopolitan also explained that RCW 18.27.040 is a one-way statute.  Id. at 302, n.3.  What is meant by “one-way” is that a subcontractor can sue up the chain and recover against the upper tier contractor’s bond, but not vice versa. Id.  Such a dynamic allows suppliers to recover against bond rather than resorting to placing a lien on the consumer’s property for a dispute that does not necessarily involve the homeowner at all.  Id. (citing Int’l Comm. Collectors, Inc. v. Carver, 99 Wn.2d 302, 308, 661 P.2d 976 (1983); Stewart Carpet Serv., Inc. v. Contractors Bonding & Ins. Co., 105 Wn. 2d 353, 365-66, 715 P.2d 115 (1986)).

Photo Credit: scottchan

Thinking about a change order in your construction contract? Write it down!

Construction projects are notoriously difficult to execute without changes.  It is the natural state of affairs that while a contractor is busy doing the work on the contract, changes arise.  Often, these changes are not due to his preference, but required by local municipalities, general contractor (if he/she is a subcontractor), or even the contract owner.

For example: a construction contract for a home may initially call for wooden shingles for the roof.  The parties may later discover that in fact the home owner’s association prohibits this, and instead, requires asphalt shingles.  Obviously, this can be a significant change depending on the anticipated budget outlined by the contract owner.  Even if your contract does not contain a provision that requires written, pre-approved change orders, it is imperative that you generate written documentation anyway.

This does not have to be difficult.  The contractor is not expected to draft a Shakespearean-level treatise, outlining all of the intricate details about the proposed change.  Rather, I recommend using a rule of thumb: the more significant the change, the more documentation is required.  If, as discussed above, the roof change comprises and additional $30,000 to the overall contract price, the contractor (and contract owner, if he is smart) should generate something akin to a contract amendment or addendum which outlines in great detail the change (including, the “why” the change had to take place…this can be quite useful down the road).  To the contrary, if the change is for something minor, like the type of garage door opener to be installed (which hypothetically adds $100 to the overall price), then less documentation is needed.  In that instance, a simple email that memorializes the (1) “why” the change was called for, (2) price difference, and a (3) narrative of the negotiations between the parties (meaning, how and when they came to agree to the change) should be sufficient.

Given that projects can assume a life of their own, and contractors and contract owners (or general contractors) can often fall victim to the habit of discarding change order formalities, then it is vital that at least some record be established of the change.  Though it may not seem like much, a short email stating “Bob and I discussed the HOA”s requirement that the roof be asphalt shingle instead of cedar and we agreed that the price would increase $30,000” can do wonders in court, should the change be disputed down the line.

(Note: I recommend utilizing emails for several reasons: (1) they are automatically date-stamped, (2) they show who was sent the message, (3) they are written, and (4) they are very difficult to get rid of.)

How subcontractors, laborers, mechanics, and suppliers are protected on public projects by RCW 39.08

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.

Liquidated damages clauses in construction contracts

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.

Unequivocal waiver of a contract term: what does it look like?

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”).

Construction_lawThe 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:

Construction_Workers“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

From that analysis, the court has clued us into what may look like an unequivocal waiver: actual notice, coupled with directions to proceed.  This resembles an estoppel argument in a lot of ways.  A contract owner may not be protected if he/she knows about change orders, then directs the contractor to do the changed work.  The court seemed to want to avoid the idea of using the contract as a payment shield after an owner draws the contractor into doing change orders.

This idea is echoed in the American Safety case.  There, the court further clarified what unequivocal waiver may look like: “[w]e stress that the discussions between the City and American Safety took place after the work was completed, and thus the situation was not one where the City was directing American Safety to perform its obligations under the contract while the parties negotiated the contractual dispute.  Had the City directed American Safety to focus on performing work rather than worrying about assembling documentation to comply with contractual provisions, then such situation could arguably be construed as implied waiver. . .”  Id. at 772.

Unequivocal waiver of a contract provision would appear to be an instance where a benefited party knows of changed circumstances and directs the other party to more forward, OR, the party is aware of the changed circumstances, then waives the contract procedures by insisting that the work be done and that the contractual formalities be put off or ignored.

Great Construction Law Resource

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’sblog.