The Construction Advantage
Considering Your Succession Plan
As the season changes from winter to spring and contractors are finishing their 2018 taxes and have last year’s results in hand, this may be a good time to step back and assess your long-term plans. Too few construction businesses have well thought out succession plans in place. A plan should take into account the owners’ goals, which may include need for retirement income, preservation of business culture and protection of key employees, maximizing opportunities for the next generation and preserving family harmony in closely held businesses, and/or maximizing the value of the company to make it more attractive for a sale.
Studies show that as many as half of business transitions are unplanned; they are forced by outside events including death, disability, divorce, conflict among owners, and insolvency. Smart construction companies should have good disaster recovery plans in place, not just for physical disasters, but for the inevitable personal or business events that may force change on a company. Planning may involve the owners’ legal, accounting, insurance, investment advisors and, in more complicated matters, may involve investment bankers and family business specialists who have expertise in both business management and family dynamics.
While a comprehensive succession plan may sound complicated and over-formal, there are many simple steps companies should take that are not too expensive and may save cost and avoid future conflicts. Shareholders’ or members’ agreements may restrict or control ownership of the company, both to be sure that owners receive value when they leave the company and that remaining owners don’t have to share ownership with strangers. They may also include management spelling out when the owners must agree before the company commits to major transactions or admits new owners or senior management. These agreements may be coordinated with insurance programs to finance transitions where the owners don’t want a third-party sale. And, of course, all owners should have up to date estate plans.
Bernstein Shur has a succession planning team that stretches across our business, tax, and estate planning groups. We understand that every business is unique, so we are ready to listen to your needs, then assess and help you reach your goals, whether a transition to the next generation, succession among co-owners, transfer to management or to employees more broadly through an ESOP, or getting the most value in a third-party sale. We work with your advisors and have our own referral network if you need help with accounting, financial management, or other aspects of your transition.
Done well, an ownership transition can be the most fun and rewarding time in the life of a business. This is just why our team loves this work, and likes to get involved early, whether in small beginning steps or a comprehensive program. Contact Arnie Macdonald if you have questions or want more information.
No Negligence Claims for Defective Workmanship: A Review of the Economic Loss Doctrine
A recent decision in the Maine Superior Court reminds us of the relevance of the economic loss doctrine when pursuing or defending a construction claim.
First adopted by the Maine Supreme Judicial Court in Oceanside at Pine Point Condominium Owners Ass’n v. Peachtree Doors, 659 A.2d 267, 270-271 (Me. 1995), the “economic loss doctrine” refers to the inability of a plaintiff to recover tort damages “for a defective product’s damage to itself.” In Oceanside, the Court reasoned that the proper remedy for such a claim is a cause of action in express or implied warranties (not negligence): “The rationale underlying this rule is that damage to a product itself means simply that the product has not met the customer’s expectations, or, in other words, that the customer has received ‘insufficient product value.’” Basically, the customer did not get what he or she has bargained for, which is a contract claim. Of course, tort recovery is still available if the defective product injured a person, or caused damage to property other than the defective product.
With respect to the construction industry, the economic loss doctrine typically prohibits tort claims (such as negligence) related to poor workmanship if the only damages alleged relate to the work itself, or a failure to complete the work. As the Court concluded in Oceanside, these claims are more properly contract claims (typically breach of contract and/or breach of warranty). Thus, a plaintiff seeking to recover such damages is limited to the claims available based on his or her contract and its associated remedies; tort remedies are not permitted.
Attempting to plead a tort, rather than contract, claim based on purely economic damages will likely lead to a quick dismissal of that claim, as the plaintiff recently learned in Wright v. Adept Building Construction, LLC, No. CV-18-436 (Me. Super. Ct. Feb. 4, 2019) (Warren, J.) (Order on Defendants’ Motion to Dismiss). In Wright, the plaintiff, among other claims, attempted to assert claims based on negligence and negligent misrepresentation related to a contract for renovation work on a residence. The Court concluded that because the plaintiff’s claims were limited to an alleged failure to perform and failure to meet a certain standard of workmanship—and did not allege, for example, that their property had somehow been damaged by the renovation work—the negligence claim was barred by the economic loss doctrine. Similarly, the Court concluded that the economic loss doctrine applied to the negligent misrepresentation claims because claims for breach of warranty and breach of contract provided an adequate remedy. The Court dismissed both the negligence and negligent misrepresentation claims.
With no ability to bring tort claims related to defective or incomplete workmanship, parties must rely on contracts for the basis of any such claims, and will be limited to the remedies available under that contract — a good reminder to pay close attention to the terms of all construction contracts.