Court Provides Guidance on ‘Pay-When-Paid’ Provisions in Construction Subcontracts
July 13, 2020 —
Ted R. Gropman & Cindy J. Lee - ConsensusDocsOn April 17, the California Court of Appeal decided Crosno Construction, Inc. v. Travelers Casualty & Surety Company of America,1 effectively narrowing the scope of enforceable “pay-when-paid” provisions in construction subcontracts to the extent the subcontractor seeks recovery against a general contractor’s payment bond surety. Although the Crosno case involved a public works project, the rationale and holding should apply with equal force to private works projects. Basing the bulk of its decision on the Wm. R. Clarke Corp. v. Safeco Insurance Co.2 case, the court found that an open-ended “pay-when-paid” provision in a subcontract is not enforceable against a subcontractor that seeks to recover on a public works payment bond claim. This article discusses the Crosno decision and the implications for contractors on both sides of the contract moving forward.
Brief Case Summary
In Crosno, general contractor Clark Bros., Inc. contracted with the North Edwards Water District (the District) to build an arsenic removal water treatment plant. Clark hired steel storage tank subcontractor Crosno Construction, Inc. to build and coat two steel reservoir tanks. Clark and Crosno’s subcontract included a “pay-when-paid” provision, which stated that Clark would pay Crosno within a “reasonable time” of receiving payments from the owner, but “in no event less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment.” After Crosno completed its work, a dispute arose between Clark and the District, and the District withheld payment from Clark (including the monies earmarked for Clark’s subcontractors). Clark sued the District for payment, and Crosno filed its own action against Travelers Casualty and Surety Company of America, the surety on Clark’s statutory public works payment bond, for recovery of the unpaid subcontract balance. Travelers rejected Crosno’s bond claim as premature, invoking the “pay-when-paid” subcontract language and pointing to Clark’s pending payment action against the District. The issue on appeal was whether the “pay-when-paid” provision in the subcontract blocked Crosno from recovering under the payment bond from Travelers while Clark’s lawsuit against the District was still pending.
Reprinted courtesy of
Ted R. Gropman, Pepper Hamilton LLP and
Cindy J. Lee, Pepper Hamilton LLP
Mr. Gropman may be contacted at ted.gropman@troutman.com
Ms. Lee may be contacted at cindy.lee@troutman.com
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Texas Walks the Line on When the Duty to Preserve Evidence at a Fire Scene Arises
October 14, 2019 —
Lian Skaf - The Subrogation StrategistThe extent to which a loss scene can be altered before adversaries can legitimately cry spoliation has long been a mysterious battleground in the world of subrogation. In the case of In re Xterra Constr., LLC, No. 10-16-00420-CV, 2019 Tex. App. LEXIS 3927 (Tex. App. – Waco, May 15, 2019), the Court of Appeals of Texas, Tenth District, addressed the question of when a party has a duty to preserve evidence. The court found that the trial court abused its discretion in imposing sanctions on the defendants for the spoliation of evidence as the evidence at issue was already gone by the time the defendants knew or reasonably should have known there was a substantial chance a claim would be filed against them.
In this matter, Xterra Construction, LLC, Venturi Capital, Inc. d/b/a Artisan Cabinets and Keith D. Richbourg (collectively, Xterra) leased a commercial space from building owners Daniel Hull and William H. Beazley, Jr. (collectively, Hull) to be used as a woodworking and cabinet making warehouse. On October 18, 2014, there was a fire at the warehouse. By October 20, 2014, Xterra informed its insurance carrier, Cincinnati Insurances Companies (“Cincinnati”) of the loss and Cincinnati’s adjuster, Leann Williams (Williams), met with Keith D. Richbourg (Richbourg) at the site. Williams also hired expert Jim Reil (Reil) to inspect the fire scene to perform a cause and origin investigation. The next day, Williams informed Hull’s attorney that Reil would inspect the scene on October 23, 2014. Hulls attorney, however, did not send anyone to the scene to participate in the inspection.
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Lian Skaf, White and Williams LLPMr. Skaf may be contacted at
skafl@whiteandwilliams.com
The Secret to an OSHA Inspection
December 02, 2015 —
Craig Martin – Construction Contractor AdvisorWouldn’t it be nice to know ahead of time what an OSHA inspector will be looking for when he comes to your work site? Well, I know the secret. And, it’s not really a secret. Just look at OSHA’s top ten citation standards and it becomes quite clear.
In 2015, OSHA’s top ten most frequently cited violations are:
1. Fall protection (C)
2. Hazard communication
3. Scaffolding (C)
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Craig Martin, Lamson, Dugan and Murray, LLPMr. Martin may be contacted at
cmartin@ldmlaw.com
Construction Defect Fund Approved for Bankrupt Las Vegas Builder
February 11, 2013 —
CDJ STAFFA federal bankruptcy judge has given his approval to a fund set up to settle potential construction defect claims as a Las Vegas home builder, America West Development, works its way out of bankruptcy. The U.S. Trustee had objected to the trust fund's structure, and claimed that it was insufficiently independent from America West. Judge Mike Nakagawa found no legal objections to the trust.
The trust will be initially funded from $1.5 million of the $10 million that Lawrence Canarelli will be paying to buy back the company he founded. Construction defect claims against the company could possibly reach $20.9 million. The Las Vegas Review-Journal reports that the fund "could pick up funding from certain legal claims and insurance.
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A Court-Side Seat: A Poultry Defense, a Houston Highway and a CERCLA Consent Decree that Won’t Budge
March 22, 2021 —
Anthony B. Cavender - Gravel2GavelFebruary saw the usual array of significant environmental decisions and federal regulatory notices.
THE FEDERAL COURTS
U.S. Court of Appeals for the District of Columbia
Luminant Generation v. EPA
The court will be grappling with a difficult venue case governed by the Clean Air Act (42 USC Section 7607(b)). In 2013, the U.S. Court of Appeals for the Fifth Circuit decided the case of Luminant Generation v. EPA (714 F. 3d 841), in which the court upheld the affirmative defenses that were made part of the Texas State Implementation Plan (SIP) and which applied to certain unpermitted emissions from regulated sources during periods of startup, shutdown or malfunction. These defenses were challenged in the Fifth Circuit and were rejected. On the national stage, EPA has been involved in litigation over these affirmative defenses and recently excluded from a “SIP Call” the Texas program, which was carved out. This EPA decision is being challenged in the DC Circuit (see Case number 20-1115),with the State of Texas arguing as an intervenor that any issues involving Texas belong in the Fifth Circuit, and not in the DC Circuit because the Act allows regional issues to be decided in the regional federal courts.
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Anthony B. Cavender, PillsburyMr. Cavender may be contacted at
anthony.cavender@pillsburylaw.com
SB800 CONFIRMED AS EXCLUSIVE REMEDY FOR CONSTRUCTION DEFECT CLAIMS
January 24, 2018 —
Jeffrey Brower and Nathan Owens - Newmeyer & Dillion, LLPIn
McMillin Albany LLC v. Superior Court (Cal. Ct. App., Aug. 26, 2015) 2015 Daily Journal D.A.R. 9931 (“
McMillin”), the Fifth Appellate District Court of Appeal in California published a resounding win for builders, general contractors, and others entities seeking the protections of the Right to Repair Act, Civil Code sections 895, et seq. (“SB800”). The
McMillin Court firmly rejected the reasoning and outcome of both
Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98 (“
Liberty Mutual”) and
Burch v. Superior Court (2014) 223 Cal.App.4th 1411 (“
Burch”), and held that:
the Legislature intended that all claims arising out of defects in residential construction, involving new residences sold on or after January 1, 2003 (§ 938), be subject to the standards and the requirements of the Act; the homeowner bringing such a claim must give notice to the builder and engage in the prelitigation procedures in accordance with the provisions of Chapter 4 of the Act prior to filing suit in court.
(
McMillin, Opinion, p. 15.) The
McMillin Court further held that even if the claimant’s counsel intentionally pleads around SB800 by asserting only tort causes of action, SB800 still applies to all defect claims and a stay of the action to require SB800 compliance is appropriate.
Newmeyer & Dillion has strongly supported builders’ efforts to enforce the Right to Repair Act since its inception. The firm filed an amicus brief in
McMillin on behalf of Leading Builders of America (“LBA”), an association of the leading residential homebuilders in the United States. For years, LBA members developed their warranty and dispute resolution procedures according to the Right to Repair Act and performed prelitigation repairs to the satisfaction of thousands of homeowners.
Liberty Mutual and
Burch undermined the Right to Repair Act by allowing plaintiffs’ attorneys to circumvent the prelitigation procedures to the detriment of homeowners and builders, resulting in confusion and increased litigation. The
McMillin decision breathes new life into the Right to Repair Act and sets the stage for future review by the California Supreme Court.
The
McMillin Court focused on the express language of the Right to Repair Act to arrive at its conclusion that Civil Code sections 896, 897, 943 and 944 demonstrate a clear Legislative intent to occupy the field of construction defect litigation – a belief held by nearly all in the construction industry and the California Superior Courts before
Liberty Mutual. The
McMillin Court found further support for SB800’s comprehensive nature in the Legislative history, which consistently described the Act as “groundbreaking reform” and a “major change” in construction defect litigation, designed to “significantly reduce the cost of construction defect litigation and make housing more affordable.” (
McMillin, Opinion, pp. 18-19.) The
McMillin Court found it inescapable that the Right to Repair Act exclusively governs construction defect litigation involving homes sold on or after January 1, 2003.
The
McMillin, decision will have a significant impact on construction litigation moving forward in two respects. First,
McMillin, is the only appellate decision to date to address whether a builder has the right to enforce SB800 when the claimant’s counsel deliberately attempts to plead around SB800 by asserting only tort claims. Second, the decision provides trial courts with the authority and precedent to ensure compliance with the Right to Repair Act. Trial courts may also find it necessary to revisit prior rulings against builders that relied on
Liberty Mutual.
Newmeyer & Dillion will continue to advocate in support of builders and general contractors by working vigorously to gain further support for the
McMillin, decision and setting the stage for review by the California Supreme Court.
Jeffrey R. Brower is an associate at the Newport Beach office of Newmeyer & Dillion, LLP. His practice focuses on business and construction litigation. Jeffrey can be reached at jeffrey.brower@ndlf.com.
Nathan Owens is the managing partner of the Las Vegas office for Newmeyer & Dillion, LLP. He represents businesses and individuals operating in a wide array of economic sectors including real estate, construction, insurance and health care in all stages of litigation in state and federal court. Nathan can be reached at nathan.owens@ndlf.com.
About Newmeyer & Dillion
For more than 30 years, Newmeyer & Dillion has delivered creative and outstanding legal solutions and trial results for a wide array of clients. With over 70 attorneys practicing in all aspects of business, employment, real estate, construction and insurance law, Newmeyer & Dillion delivers legal services tailored to meet each client’s needs. Headquartered in Newport Beach, California, with offices in Walnut Creek, California and Las Vegas, Nevada, Newmeyer & Dillion attorneys are recognized by The Best Lawyers in America©, and Super Lawyers as top tier and some of the best lawyers in California, and have been given Martindale-Hubbell Peer Review's AV Preeminent® highest rating. For additional information, call 949.854.7000 or visit
www.ndlf.com
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Colorado Senate Bill 13-052 Dies in Committee
May 10, 2013 —
David M. McLainOn April 17, 2013, the Colorado Senate Judiciary Committee voted, along party lines, to postpone indefinitely SB 52. Here is a link to the Denver Business Journal's story regarding the bill and its untimely demise: "Lawmakers kill lawsuit limits on condo defects."
Unfortunately, it will be at least another year before the legislature will have the ability to provide some much needed relief to the Colorado construction industry.
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David M. McLainMr. McLain can be contacted at
mclain@hhmrlaw.com
EPA Threatens Cut in California's Federal Highway Funds
October 14, 2019 —
Tom Ichniowski - Engineering News-RecordIn a new salvo against the state of California, the U.S. Environmental Protection Agency has threatened to restrict uses for some federal highway aid to the state unless it moves to withdraw what EPA terms “backlogged and unapprovable" plans that outline steps the state would take to reduce pollution and meet Clean Air Act standards.
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Tom Ichniowski, ENRMr. Ichniowski may be contacted at
ichniowskit@enr.com
