The Construction Advantage
You’ve Got This, Right? California General Contractors Required To Pay Subcontractors Unpaid Wages
As of January 1, 2018, all private construction contracts in California must include a provision that requires the general contractor to assume joint liability for the unpaid wages and fringe benefits of its subcontractors at any tier. Benefits include payments for workers’ compensation, pension and insurance, but general contractors are not liable for penalties or liquidated damages assessed for a subcontractor’s nonpayment. The law applies even if the general contractor has already paid the subcontractor in full, meaning the general contractor may have to pay twice.
Under the law, general contractors may protect themselves by monitoring payments and requiring first-tier subcontractors to provide a specific list of payroll and employee records and to identify sub-subcontractors upon request. If a first-tier subcontractor fails to provide the requested information, the general contractor can withhold payment of the undocumented amounts. No right exists under the law for a general contractor to request sub-subcontractor payroll information, but given the potential liability for wages at all tiers, general contractors will most likely require sub-subcontractor disclosures by contract and flow down provisions.
Individual employees cannot enforce this new law to collect unpaid wages or benefits. Instead, enforcement falls to the state’s Labor Commissioner, union trust funds, joint labor-management cooperation committees, and other third parties owed fringe benefit payments or contributions on behalf of workers. Recovery by third-party entities can include reasonable attorneys’ fees and costs, including expert fees. Suit must be brought within one year of (1) recordation of a notice of completion, (2) recordation of a notice of cessation, or (3) actual completion of the work covered by the direct contract, whichever is first.
This law will likely result in general contractors requiring:
- Payroll information of all tiers with each application for payment
- Audit rights
- Confirmation of subcontractor’s financial health
- Stronger indemnity provisions
- Payment bonds or letters of credit at all tiers
- Personal guarantees by the owners and shareholders of subcontractors
- Withholding of retention until after the one year statutory deadline
California may seem far out there, both in distance and with this law, but California may just be leading the way to a new normal.
Exceptions to No Damages for Delay Contract Provisions
Generally, in the absence of a contractual provision, a contractor who has been delayed in the performance of its contract by an owner or general contractor may recover damages resulting from the delay. “No damages for delay” clauses, however, are common in construction contracts. They bar contractors or subcontractors from seeking damages due to delays encountered on the project. Ordinarily, these provisions are fully enforceable. There are, however, several important exceptions to the rule.
New York state law, which has been the trendsetter in this area of law, generally recognizes the validity of “no damages for delay” provisions, but provides several notable exceptions to their enforceability. Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 448 N.E.2d 413 (1983). In Kalisch-Jarcho, the plaintiff was the HVAC contractor for New York City’s new police headquarters. The contract between the City and the contractor contained a no damages for delay provision. The contractor brought suit claiming the City “actively interfered” with its work by constantly revising plans and designs, and failing to coordinate the activities among its prime contractors.
The New York Court of Appeals held that the City’s “active interference” was insufficient to invalidate the no delay damages provision. But the Court also provided some guidance, holding that the contractor could have invalidated the provision had it proven “the City acted in bad faith and with deliberate intent” to delay the contractor’s work.
Subsequently, the New York courts expanded on the Kalisch-Jarcho holding and determined that a no delay damages provision may be invalidated by any of the following:
- Delays caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct
- Uncontemplated delays
- Delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee
- Delays resulting from the contractee’s breach of a fundamental obligation of the contract
Most litigation on this subject concerns whether delays were within the contemplation of the parties at the time of contract. Delays caused by lack of funding, good faith attempts by the general contractor to fix defects, or mere poor administration of the construction project are unlikely to constitute valid exceptions to a no delay damages provision. However, if the cause of a delay was truly unforeseeable at the time the contract was entered into, it may be grounds to set aside to the no delay damages provision.
Act Quickly if You Want to Object to Arbitration
A recent Vermont case reminds us of the importance of raising any objection to arbitration early in the process. In Adams v. Barr, 2017 VT 12, — A.3d — (2018), the Vermont Supreme Court ruled that a construction company that had participated in the arbitration process for nearly six months—filing a counterclaim, choosing the arbitrator, engaging in reciprocal discovery, and participating in prehearing conferences and motion practice—had waived its right to object to arbitration, regardless of the merits of that objection.
Claiming Adams Construction had failed to pay Barr Law Group more than $40,000 in legal fees, Barr filed a demand for arbitration against Adams with the American Arbitration Association. Adams filed an answer and counterclaim, and actively participated in the various stages of preparation for the three-day hearing scheduled. However, one week before the hearing, Adams filed an objection to the arbitration and a motion to dismiss the arbitration proceeding, arguing—for the first time—that the arbitration provision in the fee agreement was unenforceable. Citing Vermont law and other legal authority, Adams argued that Barr had failed to take the required steps to ensure that Adams was aware of the implications of agreeing to binding arbitration, and thus the agreement was not enforceable. Adams had no counsel of record through the arbitration proceeding, and indicated that it had only learned of this legal basis for objecting to the arbitration shortly before it made its objection.
The arbitrator denied Adams’s objection and proceeded with the hearing, which resulted in an award to Barr of the full measure of fees it sought, plus interest, and the dismissal of all of Adams’s counterclaims. Adams filed an application to vacate the arbitration award in the superior court, arguing again that the arbitration provision was not enforceable. Barr argued that Adams had waived its objection by actively participating in the arbitration for months before bringing the objection. The superior court agreed with the arbitrator, and with Barr, concluding that such active participation and last-minute objection amounted to a waiver of any challenge to the validity of the agreement. On appeal, the Vermont Supreme Court, citing relevant Vermont and national case law, agreed that “at some point prior to the actual arbitration hearing a party who participates in an arbitration proceeding without objecting to the validity of the arbitration may waive the ability to make that objection.” Declining to indicate exactly where that line is, the Vermont Supreme Court nonetheless concluded that Adams had crossed it.
Maine’s Law Court has not addressed this question squarely—yet—but it could reach the same conclusion. Better to avoid the question entirely and raise any objection to the enforcement of an arbitration provision as soon as possible. Even if you lose before the arbitrator and are forced to proceed with the arbitration hearing, you will have preserved your objection and your ability to pursue that argument on appeal. Waiting increases the risk.