Contracting Diseases: Mishaps in contract drafting, limitation of liability edition

One of the problems I regularly encounter with new clients is that they have come to me too late to do the most good. This frequently happens in the area of drafting contracts relating to their business or project. Many people say they want a “simple” contract, or they think they know what they’re signing, or that they trust the other party to the deal, so they don’t need to overthink what they’re doing. A recent decision by a Federal Court in Indiana demonstrates how costly this kind of “penny-wise” thinking can be.

SAMS Hotel Group, LLC set out to build a new hotel. Unfortunately, the architecture firm the company retained to provide the design work for the project apparently did not employ or even consult with a registered professional structural engineer for the project. The county building officials later found structural design defects, which resulted in the condemnation of the structure and its ultimate demolition before the hotel ever opened its doors to the public.

SAMS sued its architect, Environs, Inc. The trial court held that Environs breached the applicable standard of care by failing to involve a structural engineer and for failing to timely inspect the project during construction. SAMS proved damages in the amount of $4.2 million.

Now the story turns truly tragic for the developer. Environs incorporated a clause in its contract with SAMS that sought to limit its liability:

The Owner [SAMS] agrees that to the fullest extent permitted by law, Environs/Architects/Planners, Inc. total liability to [SAMS] shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract, or breach of warranty.

SAMS, as the “Owner” under the applicable contract, paid Environs a lump sum fee of $70,000. The court enforced this limitation of liability provision and held that SAMS could recover only $70,000 of its $4.2 million loss, even though the source of Environs’ liability arose out of negligence rather than a breach of the parties’ contract. The United States Court of Appeals for the Seventh Circuit affirmed the trial court’s ruling. It noted, under Indiana law, that sophisticated parties aren’t entitled to protection from even the apparently unfair terms of the contracts they sign:

[T]he general rule of freedom of contract includes the freedom to make a bad bargain.

Parties are free to enter into any kind of contract they like, but just know that if you assume you are sophisticated enough not to need a lawyer’s assistance with your contract, the court just might agree with you and hold you to what you signed.

The complete order of the Federal District Court for the Southern District of Indiana can be read here.

The complete opinion of the Seventh Circuit Court of Appeals can be read here.

Matt Drewes contributed this article. Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s eight-member Community Association Representation Group and the firm’s Creditors’ Remedies Group, and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law, and insurance. He has been included in the annual list of Minnesota’s Rising Stars for several years, and has been quoted in print publications such as the Minneapolis StarTribune, Minnesota Lawyer, Habitat Magazine, and on various websites including Yahoo!Finance.com, Bankrate.com, MSN.com, HOALeader.com, and elsewhere on issues involving construction litigation, community associations, and real property issues. He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Attorney’s Fees Arrangements In Construction Defect Litigation

Aside from taxes and death, paying the attorney may be the most disliked activity an Association Board undertakes.  But, like seeing a doctor to treat an ailment, attorneys are necessary in many cases for an Association to meet its goals of recovering money in construction defect cases.  How the Association pays the attorney in construction defect cases (this would also include cases against remodeling contractors) can be broken down into three general types of fee arrangements. 

The first and the most longstanding arrangement is the hourly fee arrangement.  In this arrangement, the Association is billed typically on a monthly basis for the actual hours spent by the attorney (including costs advanced by the attorney) in pursuit of the matter.  The Association pays as it goes, and when a recovery is made, the Association receives 100 percent of the recovery (assuming they paid their bills).

The second arrangement, which is suddenly popular, is the contingency fee arrangement.  The attorney is paid a percentage of any recovery that is made in the litigation.  Therefore, a 33 percent contingency fee arrangement means that the attorney is paid one-third (1/3) of any money that is recovered in the litigation and the Association receives two-thirds (2/3) of the money (minus any costs advanced by the law firm in the case).

The last arrangement is the flat fee arrangement.  This is not as popular as the previous two and sometimes is mixed with an hourly fee arrangement.  For example, the attorney may charge a flat fee to take the matter up to mediation and charge an hourly rate going through to trial.

The question most Associations have is which fee arrangement is the best?  As is expected when a lawyer is writing an article, the answer is “it depends.”  There are two primary goals the Association Board should seek to achieve in any fee arrangement.  First, to recover as much money as the Association needs to repair the conditions that exist at the Association after considering all the risks.  Second, that the Board be cognizant of its fiduciary obligations to the members to protect the Association’s finances and to keep as much money for the Association while advancing the first goal.

The contingency fee arrangement sounds attractive to some Boards because there is no monetary payment made as the litigation proceeds.  However, with contingency fee arrangements, the percentage amount paid to the attorney at the conclusion of the case may be much greater than the Association would have spent if it would have paid the attorney on an hourly basis.  For example, let’s assume that the Association has a $600,000 roof defect claim (cost of repair based on expert’s estimate) and has entered into a 33 percent contingency fee arrangement with a law firm.  Let’s assume further that the Association engages in mediation and based upon an evaluation of the risks and benefits and proceeding forward decides to resolve the matter for a $450,000 settlement at the mediation.  In this example, the law firm receives $150,000 in fees plus reimbursement for any costs that they advanced in the litigation (expert fees, filing fees, depositions, etc.).  For this example, let’s say that amount is $10,000.  This leaves the Association with $290,000 ($450,000 – $150,000 – $10,000 = $290,000) to fund a $600,000 repair.

The chief complaint with contingency fee arrangements is that the percentage taken by the law firm (one-third in my example) may not be based or related to actual time spent by the law firm for the work on the matter.  The law firm gets a windfall (they recover more money than they would have had the Association paid on an hourly basis).  This money is, therefore, not available for the Association to fully fund the repair.

The chief benefits of the contingency fee arrangement are the Association does not need to pay money on a monthly basis and if the Association’s claims get dismissed, the Association is not out any money in attorney’s fees (except the Association would still be liable for those costs advanced by the law firm).  In theory these benefits appear sound and advantageous to the Association. However, the Association needs to consider that most attorneys that are proceeding on a contingency fee basis have evaluated the case and generally do not take cases where the risk of getting nothing is present 

The concerns with the hourly fee arrangement are fairly obvious.  The Association may put money into a litigation and not recover enough to merit proceeding with the litigation (the money spent on the litigation surpasses the amount being recovered), or if the Association’s case is dismissed by the Court, the Association will have spent money on attorney’s fees which are not recoverable and a significant loss to the Association.  However, if the case is evaluated correctly and the risk of a zero recovery is not present the hourly fee arrangement is far more likely to net the Association more money as there is no windfall to the law firm. The law firm is compensated for the work they actually did.  This typically leaves the Association with more money to use towards the repairs.

This same concern with contingency fee arrangements can be seen in the flat fee arrangement.  There is one thing that can be said of lawyers, they do not suffer from a lack of concern for money.  The flat fee arrangement usually has a built in cushion for the attorney so they are not left working for free.  The flat fee arrangement, however, does help the Board in its budgeting so the Association knows exactly how much it is going to spend on the litigation. But like the contingency fee, the Association potentially pays the law firm more money then they actually earned.

As can be seen, there are benefits and risks to any fee arrangement.  It is critical that the Board consider all options and work with the lawyers to arrive at a fee arrangement which satisfies the two primary goals of recovering and keeping the most money to repair the conditions.

This post was authored by David J. McGee. David McGee’s practice is based in the litigation section at Thomsen & Nybeck, P.A.  Dave brings his 20 plus years of experience representing Community Associations in construction defects and insurance disputes.  Dave has recovered millions for Associations in disputes with developers, contractors and insurance companies, and heads up the firm’s “Property Insurance Claims” Group.  Dave has been named a “Top Lawyer” by Minnesota Law & Politics and Minneapolis/St. Paul Magazine for a number of years.  Dave has represented clients in numerous appellate cases including Chapman Place Ass’n, Inc. v. Prokasky, 507 N.W.2d 858 (Minn. Ct. App. 1993); Ly v. Nystrom, 615 N.W.2d 302 (Minn. 2000); and Peggy Rose Revocable Trust v. Eppich, 640 N.W.2d 601 (Minn. 2002).  Dave represents clients in arbitrations, mediations, court actions, trials, and appellate work.  Dave is a frequent lecturer and has written numerous articles in the area of Insurance, Construction, and Real Estate Law.  He is also a qualified neutral under Rule 114 of the Minnesota General Rules of Practice (mediation and arbitration).

There are a Million Reasons (Almost) for Careful Attention To Employee Time and Wages

As a restaurant in Copiague, N.Y. learned the hard way, failure to track and pay employee hours accurately can lead to a big matzah ball of legal liability.  The Wage and Hour Division of the United States Labor Department has announced that the restaurant was ordered to pay $390,000 in back wages to approximately 40 employees who had not properly been paid overtime pay and had not received the equivalent of the required minimum wage, despite working 70-80 hours per week in some cases.  Based upon “liquidated damages” provisions under applicable law, the restaurant also was ordered to pay an additional amount equal to the  back pay owed to the employees.  As a result, the restaurant was required to pay the employees a total of $780,000.  The restaurant also apparently was adjudged not to have properly tracked wages and tips, and to have paid employees with un-tracked cash payments, leading to an additional civil fine of $20,000.  All told, the restaurant is picking up an $800,000 tab for its lax record keeping and for underpaying its overworked employees.

The action against the employer was based upon the Fair Labor Standards Act, a federal law which requires employers to pay qualifying employees at least the federal minimum wage, plus time and a half for time spent at work beyond 40 hours in a given week.  Although there is no indication the violations were inadvertent in this instance, an employer is not excused from paying an employee overtime even if the employer has not directed the employee to work overtime, but the employer generally has to be aware the employee is doing so before it is responsible to pay.  There also are provisions aimed at protecting employees who report a violation of the FLSA.

There also may be state laws that apply to a given situation where there are unpaid compensation or a failure to account for employee time.  For example, our home state of Minnesota has passed legislation that  provides strong remedies to employees, and even commission-based agents, who have not been paid as required.  There are strict timing requirements that apply to these payments as well.

Employers or employees with questions about whether a business is in compliance with the law should seek the assistance of counsel in determining whether the FLSA applies and whether changes are necessary.  Also, an attorney can pursue or defend cases for recovery of unpaid wages under the FLSA as well as applicable state laws.  If you have a question, contact us at Thomsen Nybeck.

Matt Drewes contributed this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s nine-member Community Association Representation Group and the firm’s Creditors’ Remedies Group. and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law and insurance.  He has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis Star Tribune, Minnesota Lawyer, Yahoo!Finance.com, Bankrate.com, and elsewhere.  He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Minnesota Construction Warranty Claims: New Procedures for 2011

You may be familiar with (or at least aware of) the warranties provided to homeowners under Chapter 327A of Minnesota Statues.  These warranties include a one-year warranty on all workmanship and materials, a two-year warranty on plumbing, electrical or other mechanical systems, and a ten-year warranty against major construction defects.  These warranties apply to new or newly remodeled residential property (which can include single-family homes or community associations, such as condominiums or townhouses), and are binding against the builder (of a new home) or contractor (in the case of a remodeling project).  Throughout the rest of this article, I will refer to both as a “contractor”, though homeowners should appreciate there can be a difference.

For years, Chapter 327A has contained certain procedures that owners must follow to preserve a claim for a breach of one or more of these warranties.  Effective January 1, 2011, these procedures now have been revised, and new procedures have been added.  You can read the complete text of the new statute here.  The legislature’s goal in making these changes is to try to reduce the number of lawsuits that are necessary to resolve these warranty disputes, but as with any new process there will always be traps for the unwary and navigating the new procedures is bound to catch more than a few homeowners off guard.

The process still provides that written notice of an alleged defect must be provided to the contractor within six months of the discovery of the defect, with the new exception being where the owner can demonstrate the contractor had actual notice of the claimed defect. Of course, it’s best to provide timely written notice if you wish to rely on this statutory warranty.  Many owners falter by failing to provide this notice within six months of discovering the defect.

After this notice has been provided, the contractor has always been required to inspect the alleged defect within 30 days and propose a repair.  The new amendment now requires the owner to allow the contractor to conduct “invasive” testing to determine the extent of any damage or the proper type of repair, however.  Invasive testing may involve making test cuts in stucco or interior drywall and/or using a probe to test the moisture content of the wood framing members of the home, though the statute does not specify.  It is of course fair to permit the contractor a reasonable opportunity to understand fully the defect (if any) involved, and the contractor is required to place the property back into “pre-inspection condition” following any invasive procedures, but it is unclear how this restoration process will be measured or enforced in practice.

In the event the contractor inspects the property and the owner and contractor cannot agree on the proposed repair (and owners should carefully evaluate proposed repairs, preferably with the assistance of a trusted contractor, engineer or attorney), the homeowner must (yes, must) follow through with the new “home warranty dispute resolution process”.  The new dispute resolution process requires the selection of a “qualified neutral” from a list maintained by the Minnesota Department of Labor and Industry, which will charge aspiring neutrals a $200 fee to be listed.  There are rather short timeframes applicable to the steps for selecting a neutral, so homeowners should consult with an experienced member of the construction industry and/or their own construction attorney before submitting their claim to the commissioner of the Minnesota Department of Labor and Industry.  Otherwise they will find themselves with little time to make a decision about the neutrals from which they must choose to evaluate their case.

After a neutral has been selected, the parties must meet together with the neutral and each will submit its own reasons why its proposed repair is proper.  There is a fee of $25 per party for participation in the process, in addition to the hourly fees of the neutral third-party the parties select.  It also is possible the parties will use attorneys to represent them through this process, and contractors with insurance coverage almost certainly will have attorneys present to represent them, though homeowners presumably will not be required to do so.  According to the amendment, at the end of this process the neutral third party does not issue a binding decision (it simply is an evaluation). Moreover, this evaluation may not be used as evidence in any later litigation if the “unreasonable” party does not care to acknowledge that it is being unreasonable. The process does, however, provide the parties with perhaps some further understanding of the potential damages at stake and chances of a favorable (or unfavorable) result.

Barring certain exceptions, the parties must complete this process before litigation can be commenced.  However, there are four situations which owners may commence litigation earlier if the contractor is not engaging in the process in good faith:

1) The homeowner may sue the contractor immediately if:

a) the contractor fails to conduct an inspection within 30 days after the owner has provided written notice of the defect;

b) the contractor performs the inspection but fails to provide a written proposal to make a repair of the alleged defective condition within 15 days after the inspection is complete;

c) the contractor provides a proposed repair, to which the owner agrees, but the contractor does not perform the repair.

2) The homeowner may also sue the contractor following the expiration of 60 days from the owner’s receipt of the contractor’s repair proposal, whether or not the dispute resolution process is complete.

In the event the evaluation process is not successful in bringing the owner and contractor to a resolution, the new amendment also alters certain timing considerations applicable to a construction defect lawsuit. This is because there are numerous claims (or theories of recovery) applicable to construction defect cases. These can include not just a claim that the contractor breached one or more of the statutory warranties under Chapter 327A, but also that the contractor breached an applicable contract, or that the contractor was negligent. There are also other warranties that may apply, including warranties applicable to common interest communities (condominiums and townhouses) as well as warranties covering the sale of goods (such as windows, doors, shingles, etc.). Each of these claims has not only its own standards, but each also has an applicable limitations period (the period within which you must sue or your claim is barred) which may be different from the next. The amendments to 327A now provide that, for as long as an owner is following this statutory procedure, or for 180 days, whichever is longer, all of those claims will be “tolled” (meaning their expiration will be delayed). This is a useful provision for ensuring a homeowner does not lose the right to commence litigation as a result of participating in this mandatory dispute resolution process.

The new provisions of Chapter 327A certainly have created more opportunities for construction defect cases to reach resolution outside of court, in theory.  However, there is little likelihood that a contractor who was being unreasonable under the prior procedures failed to realize it was being unreasonable, and there is little consequence to a contractor that fails to reach a reasonable resolution even under this new scheme.  Therefore, until we have seen this process utilized a few times, we do not know whether it will provide aggrieved homeowners with a legitimate alternative to litigation, or just another hurdle to clear to obtain a recovery under Chapter 327A.  In the meantime, if you have any questions about whether this process applies to you and how to comply with its provisions, contact Matt Drewes or one of the other construction litigation attorneys at Thomsen Nybeck.

Matt Drewes contributed this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s 10-member Community Association Representation Group and co-leads the firm’s construction litigation group.  Matt practices in the areas of business and real estate litigation, construction litigation, community association law, debtor/creditor law, insurance and employment, has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis Star Tribune, Minnesota Lawyer, Yahoo!finance.com and Bankrate.com, and elsewhere.  He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Matt Drewes Quoted in Articles About Construction Defects Appearing at HOAleader.com

Matt Drewes recently contributed quotes for the following articles published at www.hoaleader.com, a national web-based publication focused on homeowners association and condominium board members and association management professionals: 

• “HOA Construction Defects: Don’t Shoot Yourself in the Foot” (http://www.hoaleader.com/public/373.cfm), Matt Humphry, December 11, 2009, Publisher: Plain-English Media, LLC;

 

• “What Your HOA Must Know About Construction Defects” (http://www.hoaleader.com/public/372.cfm), December 2009, Publisher: Plain-English Meda, LLC

Matt Drewes is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s 10-member Community Association Representation Group and co-leads the firm’s construction litigation group.  Matt practices in the areas of business and real estate litigation, construction litigation, community association law, debtor/creditor law, insurance and employment, and has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years.  He can be reached at mdrewes@tn-law.com.

A Guide to Mechanic’s Liens for Property Owners, Subcontractors and Material Suppliers.

Mechanic’s liens in Minnesota exist to protect contractors, subcontractors and materials suppliers from going unpaid by giving them a lien on the property they helped improve.  Liens give the power to foreclose on property to ensure they are paid, and can provide protection against the bankruptcy of the person obligated to pay for the work.  In exchange for this powerful remedy, a potential mechanic’s lien claimant must comply with extremely technical requirements.  This posting will focus primarily on the rights of subcontractors, but they’re not the only ones who need to know what their lien rights may be.  Property owners may care about this as well.  You should understand when a subcontractor may place a lien on your home and when and how that mechanic’s lien can be foreclosed.  The rights of a general contractor are similar, but there are important differences that we will cover in a later post.

Subcontractors (the trades) and materials suppliers arguably face the greatest risk of nonpayment on a construction or remodeling project.  They rely on the owner to pay the prime contractor (or general contractor) and for the general contractor to use that money to pay them.  For them, the right to a mechanic’s lien is extremely important.  If you’ve been burned by non-payment one too many times, consider the following and talk to an attorney about getting a procedure in place to protect your lien rights.  Your collection costs can usually be recovered so there is no reason not to seek all possible protections even on relatively small claims.

Here are the steps to preserving and enforcing mechanic’s lien rights:

1.  When you start a project, gather the information you will need to protect and enforce your lien rights.  It is much easier to do this at the start of a project than after you’re not getting paid and people have become guarded and stop communicating.  Some things you will need to know are: the interest in the property held by the person or party arranging for the work to be performed (if it is a tenant this will be important); the Property owner’s name; and the street address of the property (as well as the legal description, if available). 

2.  Provide a “pre-lien” notice to the owner within 45 days from the date you start work.  A sub-contractor or material supplier who does not have a contract with the property owner may not claim a lien if it doesn’t give the appropriate notice to the property owner within 45 days of the date it first provided its service or materials.  There are certain exceptions, generally relating to large commercial projects, but it never hurts to provide the notice even when it’s not necessary.  The notice must be delivered to the property owner by personal service or by certified mail, and there is very specific statutory language that must be used.  There are even requirements about the size of print used. 

3.  Record or file the lien within 120 days after you complete your work.  A sub-contractor or supplier has 120 days from the last item of labor, skill or material contributed to the improvement.  To be safe, start counting from the last day you provided a significant amount or component of the work or materials required under your original contract.  Don’t assume tightening a screw, re-attaching some siding or even newly-added work will extend your rights.

4.  The devil is in the details.  The lien itself must contain certain information.  Also, it must not only be recorded in the real property records, but it must also be served on the property owner either by personal service or by certified mail.

5.  Do not delay.  If you serve and record your lien, but you still don’t get paid, you will have to bring a lawsuit to enforce the mechanic’s lien within one year from the date you contributed your last item of work or materials.  Before you start the suit, make sure you include all the parties who have a right to be included.  This will include the property owner, as well as all the other contractors, subcontractors, material suppliers and any others who have mechanic’s liens of their own, as well as any other party with an actual or claimed interest in the property.  

6.  It would be best to involve a competent attorney at the earliest step.  Mechanic’s lien law in Minnesota permits the recovery of attorneys’ fees spent enforcing the lien rights.

If you are owed money, but you don’t think you may have the right to a mechanic’s lien, you should still consider contacting an attorney.  You may fall into an exception for the required pre-lien notice.  You may also have certain other claims, and even small amounts, taken as a whole, may be worth pursuing.  If you own a home or property and are worried about how to handle mechanic’s liens or mechanic’s lien notices, there may be ways to resolve the issues and reduce your stress.  Regardless of your role or situation, if you have questions about a mechanic’s lien or other construction-related issue, contact Thomsen Nybeck.

Entry by Matt Drewes.