Thursday, December 29, 2011

New Laws for 2012, Part 4

The following is the final segment of my series regarding new laws that may affect how you do business in California in 2012. There were several laws passed impacting prevailing wage, public works, and Project Labor Agreements, which are summarized for you below.

Pursuant to AB 436, the method by which the Department of Industrial Relations sets reimbursement rates for its costs of performing prevailing wage monitoring and enforcement on specified public works projects (for school districts, community college districts, and other specified special districts) has been revised. The rules exempt from the requirements those public works projects financed by any part of the Water Security, Clean Drinking Water, Coastal and Beach Protection Act of 2002. Further, the reimbursement to the DIR may be waived when the public entity has entered into a collective bargaining agreement binding all the contractors performing work on the project (i.e., a Project Labor Agreement, or PLA).

For prevailing wage violations on public works, AB 551 increased the maximum penalty to contractors and subcontractors who are found to have failed to pay prevailing wage from $50 per day, to $200 per day. The bill also increased the minimum penalty from not less than $10 per day, to not less than $40 per day, and excepts only certain mistakes found to be in good faith.

Presently, existing law requires prevailing wages be paid for the hauling of materials into a public works construction site, as well as the hauling of refuse off of the site. Now, however, under AB 514, if refuse is hauled from the site and thereafter sold as a commodity, prevailing wage does not apply. “Refuse” is further defined to include soil, sand, gravel, rocks, concrete, asphalt, excavation, materials and construction debris.

Existing law requires contractors and subcontractors on public works to keep payroll records regarding its employees, and requires these records contain specific information as dictated by the Division of Labor Standards Enforcement. Certain personal identification information must be removed when certified payroll records are made available for inspection to the public, or to a public agency. AB 766 however, now requires nonredacted copies of certified payroll records to be provided upon request to any agency included in the Joint Enforcement Strike Force on the Underground Economy (JESF), or to any law enforcement agency. Disclosures to the public require redaction of individuals’ names, addresses, and social security numbers.

SB 117 prohibits a state agency from entering into a contract for goods or services in excess of $100,000 if the contractor discriminates between employees with spouses or domestic partners of a different sex and employees with spouses or domestic partners of the same sex, or discriminates between same-sex and different-sex domestic partners of employees, or between same-sex and different-sex spouses of employees.

SB 136 expands the definition of “public works,” thereby extending prevailing wage requirements to include construction, alteration, demolition, installation, or repair work done under private contract that satisfies specified conditions related to energy. Specifically, prevailing wages must now be paid under private contract when the following conditions exist: (a) the work is performed in connection with the construction or maintenance of renewable energy generation capacity or energy efficiency improvements; AND (b) the work is performed on the property of the state or a political subdivision of the state; AND (c) either of the following conditions exists: (1) more than 50% of the energy generated is purchased or will be purchased by the state or a political subdivision of the state; OR (2) the energy efficiency improvements are primarily intended to reduce energy costs that would otherwise be incurred by the state or a political subdivision of the state. (See newly added Labor Code § 1720.6.)

SB 922, effective January 1, 2015, establishes the parameters for the use of Project Labor Agreements (PLAs) for publicly-funded construction projects. State funding may not be used to support any project by a charter city that has in place charter provisions, initiatives or an ordinance prohibiting the governing board’s consideration of a PLA.

Questions? Concerns about how this may impact your business? Comment, or send me an email, and let’s discuss. Best wishes for a happy, fulfilling and successful new year!

Nothing in this blog is intended to create an attorney-client relationship. This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation. Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.

Thursday, December 22, 2011

New California Laws for 2012, part 3

The following is part 3 of my series regarding new laws effective January 1, 2012 (unless otherwise indicated), that may affect how you do business in California.

Elimination of Type 1 Indemnity effective January 1, 2013

Type 1 indemnity provisions were eliminated in residential construction subcontracts in 2009 by statute. SB 474, which amends Sections 2782 and 2783 of the Civil Code, and adds section 2782.05, now eliminates type 1 indemnity provisions in commercial construction subcontracts.

For construction contracts and amendments executed on or after January 1, 2013, a general contractor may no longer require a subcontractor to defend against, or provide insurance coverage to defend against, the active negligence or willful misconduct of the general contractor. The general contractor may also no longer require a subcontractor to defend against claims for defects in design. Lastly, the general contractor may not require a subcontractor to defend against claims that do not arise out of the scope of work of the subcontractor pursuant to the written subcontract.

This new statute also provides that public agencies and private owners cannot shift liability for the agencies’ or owners’ active negligence to the contractor (the statute previously only provided so for public entities). The new statute authorizes a general contractor to request that a subcontractor either provide a defense, or pay for the general contractor’s defense (under a type II or III indemnity provision), but the subcontractor who does so can request reallocation and reimbursement of defense costs under certain circumstances, for example, if costs were paid by the subcontractor that were ultimately deemed to be related to claims outside the scope of work of the subcontractor.

This is a major change to the law of indemnity, the contracting relationship between generals and subcontractors, and the handling and management of claims when they arise.

Prompt Payment Provisions, Payment Bonds and Retention

SB 293 amends and repeals several sections of the Business & Professions Code, Public Contracts Code and Civil Code, relating to the timing of payment of progress payments (and the trigger for prompt payment penalties which may attach), and retention.

Under existing law, whether a private or public work of improvement, a contractor is required to pay its subcontractor a progress payment within ten days of the contractor’s receipt of payment from the owner, unless agreed to otherwise in writing. These new laws now require that payment to be made within seven days. See my earlier blogs related to prompt payment penalties, and how they are calculated for more information on prompt payment penalties specifically.

The statutory changes also now exempt laborers from the requirement to serve a preliminary 20 day notice to make a claim on a payment bond.

Lastly, these changes lower the retention withholdings allowed on public works, presently 10%, to no more than 5%. The only exemption is if a general contractor required a subcontractor to post a bond, and the subcontractor was unable to comply.

Questions? Concerns about how this may impact your business? Comment, or send me an email, and let’s discuss. Best wishes for a happy holiday season!

Tuesday, December 20, 2011

New Laws Affecting Your Business in 2012, part 2

The following is part two of my series regarding new laws that may affect how you do business starting January 1, 2012. Let’s take a look, and discuss how these laws may impact you.

Apprenticeship and Certification

AB 554 amends section 14230 of the Unemployment Insurance Code, and directs the state and local Workforce Investment Boards to ensure that programs and services funded by the federal Work Investment Act of 1998 (WIA) are conducted in coordination with apprenticeship programs, and encourage collaboration between community colleges and apprenticeship programs. Existing law contains various programs for job training and employment investment, including work incentive programs, in which states may participate. This bill requires the California Workforce Investment Board (WIB) and each local board to ensure that programs and services funded by the WIA are directed to apprenticeable occupations, including preapprenticeship training, and are conducted in coordination with apprenticeship programs approved by the Division of Apprenticeship Standards for the occupation and geographic area. The California WIB and local boards are required to develop a policy of fostering collaboration between community colleges and approved apprenticeship programs in their geographic areas.

AB 1346 amends sections 3099 and 3099.2 of the Labor Code, making some non-substantive clarifications to existing law. The change relates to reporting by applicants for electrician certification. Under the existing certification process, an applicant must demonstrate at least four years of experience in the class for which he or she is applying in order to qualify to take the electrical certification examination. Now, applicants must submit with their application an employment history report from the Social Security Administration (SSA). Because employers are required to withhold a percentage of an employee’s paycheck and remit that amount to the Social Security Administration, an accurate and complete job history can be confirmed by report from SSA.

Contractor State License Board (CLSB)

AB 397 adds section 7125.5 to the Business & Professions Code, relating to workers’ compensation insurance. Existing law requires private employers to secure its employees’ payment of compensation by obtaining and maintaining workers’ compensation insurance or to self-insure. The CSLB requires every licensed contractor to have on file with it at all times a current and valid Certificate of Workers’ Compensation Insurance or Certificate of Self-Insurance, or a statement establishing the contractor is exempt because he or she has no employees. This bill requires any contractor claiming exemption to recertify the exemption or provide a Certificate upon renewal.

AB 878 amends section 7125 of the Business & Professions Code . Under existing law, workers’ compensation insurers are required to report to the CSLB registrar specified information regarding a contractor’s workers’ compensation policy. This bill now requires workers’ compensation insurers to report to the CSLB when it cancels a policy as a consequence of a premium audit or investigation, a material misrepresentation by the contractor that resulted in financial harm to the insurer, and when no reimbursement has been made by the contractor to the insurer. The information provided is not subject to the California Public Records Act. Willful and deliberate disregard or violation of workers’ compensation laws provide a basis for discipline by the CSLB.

SB 543 amends a multitude of provisions contained within the Business & Professions Code, but most significantly, extends the authority of the CSLB through January 1, 2016.

SB 392, which was passed in 2010, but becomes effective January 1, 2012, allows for a limited liability company (LLC) to provide contracting services. Under existing law, an LLC was precluded from rendering professional services. By amending pertinent provisions of the Business & Professions Code, and Corporations Code, an LLC may now render services pursuant to a license, and authorizes the CSLB to issue licenses to an LLC, provided it designates a Responsible Managing Member, Responsible Managing Officer or Responsible Managing Employee to qualify for that license. The law requires a $100,000 surety bond arising out of specified claims of employees. The bill also has very specific insurance requirements, and violation of certain portions of contractors’ license law by an LLC constitutes a crime. If you are a contractor and are considering changing the form of your business to an LLC, please consult with a professional.

Questions? Concerns about how this may impact your business? Comment, or send me an email, and let’s discuss.

Monday, November 7, 2011

New Laws for 2012, part 1

The California Legislature has been busy, and several new laws have been signed by the Governor that may affect how you do business starting January 1, 2012. Governor Brown completed action on the 2011 legislative session on October 9, 2011, with a veto rate of 14.3%. Of the 889 bills that made its way to the Governor’s desk in 2011, 760 were signed, 128 vetoed, and one became law without his signature. Over the next few weeks, we’ll take a look at some of these new laws, and discuss how it may affect what you are doing as a small business owner.

Employment and Employer Related Laws:

AB 22 was passed, which will become revised Civil Code § 178.20.5. This law, effective January 1, 2012, prohibits an employer or prospective employer from using a consumer credit report for employment purposes. Existing federal and state law specifies the procedures an employer is required to follow before requesting a report, and if adverse action is taken based upon the report. Under existing state law, an employer may request a credit report for employment purposes so long as he or she provides prior written notice of the request to the person for whom the report is sought. Also, the written notice must inform the person that a report will be used, the source of the report, and contain space for the employee/applicant to request a copy of the report. If an employer bases adverse employment decisions upon information contained in a consumer credit report, under existing law, the employer is required to so advise the employee/applicant, and provide him/her with the name and address of the consumer credit agency making the report.

AB 22, however, prohibits the employer or prospective employer, with the exception of certain financial institutions, from obtaining a consumer credit report for employment purposes unless the position of the employee/applicant is (1) a position in the state Department of Justice, (2) a managerial position, as defined in the statute, (3) that of a sworn peace officer or other law enforcement position, (4) a position for which the information contained in the report is required by law to be disclosed or obtained, (5) a position that involves regular access to specified personal information for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, (6) a position in which the person is or would be named signatory on the employer’s bank or credit card account, or authorized to transfer money or enter into financial contracts on the employer’s behalf, (7) a position that involves access to confidential or proprietary information, as specified in the statute, or (8) a position that involves regular access to $10,000 or more of cash, as specified. If one of these eight exceptions applies, the employer must inform the employee/applicant which of the specific reasons applies for obtaining the report, and then comply with existing law as it relates to the process for securing the report, and reporting if an adverse employment decision is made. This may be a case where the exceptions swallow the rule, but strict employer compliance is crucial.

Next on the employment front, AB 240 was passed, amending Labor Code § 98, authorizing the Labor Commissioner (“LC”) to recover liquidated damages for an employee who brings a complaint alleging payment of less than the minimum wage. Existing law authorizes the LC to investigate employee complaints and to provide for a hearing to recover wages, penalties and other compensation demands properly before the LC or the Division of Labor Standards Enforcement. Existing law allows an employee to recover liquidated damages in a court action alleging payment of less than the state minimum wage; this statute essentially now allows a similar recovery when being heard pursuant to a complaint before the Labor Commissioner. The amount of liquidated damages presently authorized by statute is twice the wages unlawfully unpaid, and interest thereon.

Mechanic’s Liens:

AB 456 clarifies an issue relative to the service of a recorded mechanic’s lien upon the owner or purported owner of a property. Existing law requires a claim of mechanic’s lien to be served on the “owner or reputed owner” of the property in order to be valid. Accompanying the lien is a proof of service affidavit which is required to state the name of the person upon whom the mechanic’s lien was served (but not the capacity in which that person was served). This bill, amending Civil Code §§ 3084 and 8416, clarifies that the affidavit must state not only the name of the owner or reputed owner of the property, but also the title or capacity in which that person or entity was served, effective January 1, 2012. As you know from attending my annual mechanic’s lien seminars, strict compliance with the mechanic’s lien statutes is critical, as an error, no matter how seemingly minor, will likely invalidate your mechanic’s lien.

AB 424 gives design professionals providing services for private works of improvement the ability to convert a design professional’s lien into a mechanic’s lien. Under current law, a design professional may validly lien the project site, even if the planned work of improvement fails to commence, for the amount of the design professional’s fee provided under the contract, or the reasonable value of those services, whichever is less. Subject to specified conditions, a design professional may record a mechanic’s lien for providing work authorized for a work of improvement. AB 424, amends Civil Code § 8319, to allow a design professional to convert a recorded design professional lien to a mechanic’s lien if (1) the design professional lien has expired, (2) the design professional lien remains fully or partially unpaid, (3) the design professional records a mechanic’s lien within 30 days of the expiration of the design professional lien, and (4) the mechanic’s lien states that it is a converted design professional lien. The design professional is required to comply with all laws regarding recordation of a mechanic’s lien, except any preliminary notice requirements. The converted design professional lien is entitled to the same priority as a mechanic’s lien, set forth in Civil Code § 8450.

Questions? Concerns about how this may impact your business? Comment, or send me an email, and let’s discuss.

Please also consider visiting the Santa Maria Valley Contractor’s Association website at www.smvca.org, and sign up for my Mechanic’s Liens and contractor’s statutory rights and remedies seminar, scheduled for December 16, 2011 in Santa Maria, California! Don’t get caught without the best information and construction forms for doing your business in 2012!

Friday, September 30, 2011

Sole Source Specifications for the Contractor's Soul

If a project owner specifies the use of a proprietary product, a particular brand and model, the contractor often finds herself dealing with a sole-source supplier. If that supplier proves unable or unwilling to deliver the product in a timely manner, who is responsible for the resulting delay on the project? The project owner who mandated the product, or the contractor who has a contract with the supplier?

A California court recently grappled with this issue. The contract in question, like most public works contracts, allowed the contractor to propose substitute products that were “equal” to the specified proprietary product. From that, the court concluded the provision was not a sole-source specification. The result? The contractor – not the project owner – was responsible for the delay caused by late delivery. This was a great argument for the lawyers in the courtroom, but doesn’t necessarily reflect the real-world goings-on in the field. Substitution requests deviating from the specified proprietary product are frequently rejected. Interestingly enough, the appellate court did not question the trial court’s ruling that if in fact the provision in the contract was deemed a sole-source products clause, then the owner bears the risk of late delivery.

It is not always clear when project owners bear the risk of late delivery of specified sole-source products. On federal contracts, the federal project owner warrants only that the sole-source supplier is capable of providing the specified product. The federal project owner does not warrant the supplier will be willing or able to provide the product in conformance with the project schedule. The theory, of course, is the contractor was capable of conducting a pre-bid investigation of the availability of the specified product, and is on the hook for securing a timely delivery.

What do you think? If a project owner insists on one particular product for its project, shouldn’t the owner bear the risk if there are delivery problems? If you have concerns about what you can do to protect yourself when faced with sole-source specifications, give me a call and let’s talk about it!

Nothing in this blog is intended to create an attorney-client relationship. This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation. Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.

Monday, September 19, 2011

Mollenkopf Law Group is online!

Mollenkopf Law Group is up and running! Check out my website at www.MollenkopfLawGroup.com. More scintilating blogs to follow, as soon as I get these boxes unpacked!

Monday, September 12, 2011

IS EXPERT OPINION TESTIMONY REGARDING LOST PROFITS ADMISSIBLE IF YOU HAVE AN UNESTABLISHED BUSINESS?

In these times of economic uncertainty, the failure of a relatively new or unestablished business is not uncommon. But what happens when the business fails due to the wrongdoing of another? How does the trier-of-fact value the lost profits with no track record of earnings to look to?

The California Supreme Court has granted review to decide the question of what is the permissible scope of expert testimony regarding lost profits claimed by an unestablished business. (Sargon Enterprises, Inc. v. University of Southern California (case no. S191550) ___Cal.4^th ___.) In California, when a defendant prevents the operation of an unestablished business, the plaintiff may recover an award of lost profits only by showing with reasonable certainty their nature and occurrence. In Sargon Enterprises, the plaintiff alleged he invented a superior dental implant, but was unable to market the implant because of defendant’s alleged breach of the clinical trial agreement. Plaintiff’s expert witness on the issue of damages would have testified the anticipated lost profits depended principally on the implant’s innovativeness. Therefore, if the jury found a high degree of innovation, plaintiff would have achieved a larger market share, and larger profits, than if the jury found a lower degree of innovation. The lost profits calculated applying the plaintiff’s expert’s theory ranged from $1.18 billion to $220 million. However, the trial court excluded the expert’s testimony as speculative.

In a split decision, the Second District Court of Appeal reversed the trial court’s evidentiary exclusion. The majority held the trial court’s ruling was “tatamount to a flat prohibition on lost profits in any case involving a revolutionary breakthrough in an industry,” while also acknowledging the “factor of innovation…is not easily converted into dollars and cents.” The dissent opined the trial court had acted within its discretion ruling a comparison of “degrees of innovation” was inherently speculative.

The California Supreme Court has granted review, framing the issue before it as: “Did the trial court err in excluding proffered expert opinion testimony regarding lost profits?” Undoubtedly, this decision will be of importance to the technology industry in our State.

If you are interested in following this case as it moves through the briefing process, to oral argument and decision, visit http://appellatecases.courtinfo.ca.gov/, search for the case number provided above, and enter your email in the box provided. Questions? Please don’t hesitate to contact me!

Friday, September 9, 2011

Corporate Form May Not Protect You Personally From Employee Claim of Discrimination

Most business people form a closely held corporation, such as an S corporation or LLC, to insulate themselves from personal liability for their business’ operations. Until recently, there was disagreement about whether an employee, suing for discrimination in violation of state law, could hold a sole shareholder personally liable for the obligation of the corporation.

In a recent case from the Third District Court of Appeal, Leek v. Cooper (2011) 194 Cal.App.4^th 399, the employees of a car dealership sued the dealership and its sole shareholder for age discrimination. The employees/plaintiffs argued the sole shareholder also should be personally liable for their damages because of the level of control he exercised over their employment. At the trial court level, the shareholder filed a motion for summary judgment seeking to have judgment entered in his favor. His motion was granted, in effect, releasing the sole shareholder from personal liability for any judgment that may ultimately be entered against the corporation.

The employees appealed. The Court of Appeal, however, affirmed the decision of the trial court. The Court of Appeal held an employee may recover against the sole shareholder of an employer corporation for discrimination in violation of state law, but only where the employee can demonstrate the shareholder is the “alter ego” of the employer. The term “alter ego” has a very specific meaning under the law. The Court of Appeal explained that mere control was not enough to establish liability for breach of a duty owed only by an employer, and that the sole shareholder could be held liable only if plaintiffs proved the traditional elements of “alter ego” liability, including a “unity of interest” between the shareholder and the corporation, and an “inequitable result” if the alleged discrimination was treated as an act of the corporation alone.

What does this mean? In the end, things worked out well for this particular sole shareholder. But if you are the sole shareholder of your closely held corporation, the disgruntled employee suing you may have a lawyer who has read the Leek decision, and may plead you personally into her complaint. What does “unity of interest” mean in your particular circumstance? How might one of your employees argue an “inequitable result” if you are not held personally liable? These are risk management issues best covered in a personal consultation, analyzing the facts and circumstances specific to your business, your insurance coverage, and other tools designed to mitigate risk. Call me. Let’s talk.

Wednesday, September 7, 2011

"Pay-if-paid" Clauses in Construction Subcontract Agreements -- Are They Legitimate?

“Pay-if-paid” clauses in subcontracts purport to shift the risk of project owner nonpayment from the prime contractor to the subcontractor. If drafted carefully, with express “condition precedent” language, they are enforceable in most (but not all) jurisdictions. The clauses, however, are understandably resented by trade contractors. The prime or general contractor elected to do business with the project owner and had the opportunity to ascertain the financial capability of that owner? Why should a subcontractor, which contracted only with the prime, be asked to assume the risk of owner insolvency?

In a recent federal appeals court decision, an enforceable pay-if-paid clause in a subcontract had been modified. If the prime contractor did not receive final payment from the owner within six months of the date due, the prime would pursue payment remedies against the owner and make a pro rata distribution of any recovery to the unpaid subcontractors. The subcontractor in question still received only a fraction of the subcontract balance. But the risk of owner insolvency was at least shared by the prime, which disbursed the full settlement amount to its subs.

A risk sharing arrangement, such as the one described above, may be a reasonable compromise. How do you feel about pay-if-paid clauses? Should a prime contractor assume all the risk of project owner insolvency? Or is it fair to pass that risk through to the subcontractors as a cost of doing business?

Tuesday, August 30, 2011

The 800 Pound Gorilla in the Contract: the Indemnity Provisions

One of the most frequent inquiries I receive from contractors and subcontractors alike is what does this indemnity provision really mean, and is there any way to reduce my exposure?

Generally, “indemnity” is the obligation resting on one party to make good a loss or damage another party has incurred, which obligation may be expressly provided for by contract, implied from a contract not specifically mentioning indemnity, or may arise from the equities of particular circumstances. In California, indemnity is defined at Civil Code § 2772: “Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or some other person.” The party being required to provide the indemnity is called the “indemnitor.” The person receiving the benefit of the indemnity is the “indemnitee.”

In the construction arena, indemnity is a contractual provision that shifts the risk. By way of example, an insurance policy is nothing more than an indemnification contract (shifting the risk) subject to the specific terms, conditions and exclusions contained within the policy agreement. The same goes here: the indemnity provision in your construction prime contract or subcontract seeks to shift the risk subject to the specific terms, conditions and exclusions contained within the agreement. Lawyers typically refer to the contractual indemnity provisions contained in your average construction contract as being of one of three different types: Type I, Type II or Type III (…original, I know).

A Type I provision requires indemnification for the indemnitee’s damages from tort liability, including the active or passive negligence of the indemnitee (in other words, what he/she did or didn’t do), and strict liability. To be enforced in a court of law, a Type I agreement must be explicit, clear and unequivocal. A case famous (or infamous) in legal circles known as Continental Heller ’97 declared a finding of fault or even a causal connection between the indemnitee’s conduct and the harm is not required to enforce the terms of a Type I agreement. The court opined the parties are at “great freedom of action in allocating risk,” and the parties were “expected to review, understand and bargain over their indemnity agreement.” Under a Type I agreement, the only exceptions to an obligation to indemnify is if the indemnitee is solely responsible for the harm, or committed a willful wrongful act. In other words, if you are the subcontractor in a contract with a general contractor with a Type I agreement, you must pay the general contractor (and usually the owner) for all damages and claims, regardless of whether the general contractor (or owner) contributed to causing the damage to a substantial degree, and regardless of the minimal nature of your contribution to the harm.

A Type II provision is less onerous than a Type I from the subcontractor’s perspective, and requires indemnification for the passive, but not active liability of the indemnitee. In other words, as the subcontractor in a contract with a general contractor with a Type II agreement, you must pay the general contractor (and usually the owner) for all damages and claims caused by an omission (failure to act) of the general contractor (or owner), but not for the active negligence of the general contractor (or owner).

A Type III provision is the least onerous indemnity obligation from the subcontractor’s perspective. A Type III provision requires indemnification only for the liabilities caused by the indemnitor, not the liabilities caused by anyone else. In other words, as the subcontractor in a contract with a general contractor with a Type III agreement, you are required only to pay the general contractor (and usually the owner) for damages and claims caused by your own conduct.

The basic components of indemnification include (i) the obligation to hold the indemnitee harmless, defend and indemnify the indemnitee, and waive subrogation claims; (ii) the length of the obligation, generally during construction and after completion; (iii) provide an additional insured endorsement, noting the indemnity provision may require indemnity regardless of the limits of insurance coverage. In fact, most standard ISO CGL policies exclude coverage for liability assumed in a contract.

Clear as mud? Here are some questions you can ask yourself when reading the indemnity provision in your contract:

1.         How broad is the indemnification provision in the subcontract - e.g., does it require you (the subcontractor) to indemnify under all conditions except when the general contractor is solely negligent?

2.         Does the indemnity clause match that included in the contract between the prime contractor and the owner?

3.         Does your (subcontractor's) insurance provide coverage for contractual liabilities, including indemnification obligations assumed under subcontract indemnification clauses?

It is critical to first understand the obligations being imposed upon you (the indemnitor), so that you are in the best position to try to negotiate the terms of that provision with the proposed indemnitee. Questions? Call me to discuss the particulars of your situation.

Thursday, August 25, 2011

Prompt Payment Penalty Statutes: What is a bona fide dispute anyway?

In California, the payment of contractors and subcontractors is governed by "prompt payment statutes,” which impose sanctions on the non-paying party for failure to timely pay. These statutes are littered throughout the Code: for example, progress payments by general contractors to their subcontractors on private and most public works of improvement are governed by Business & Professions Code § 7108.5; retention payments to subcontractors on public works are governed by Public Contracts Code § 7107, and Civil Code § 3260 for private works. These sanctions range from a 1.5% to 2% per month penalty on the wrongfully withheld balance in lieu of interest, the 2% penalty plus interest, or statutory interest alone, and in some cases attorney fees and costs.

Although there are subtle differences amongst the payment obligations imposed by these statutes, generally, payment must be released to subcontractors within a specified time following receipt by the contractor, except when there is a dispute, or when the parties have agreed in writing to a different payment plan. If there is a "good faith dispute over all or any portion of the amount due on a progress payment," the general contractor may withhold up to 150 percent of the disputed amount. (Bus. & Prof. Code § 7108.5(c).) On a public work, "if a bona fide dispute exists between the subcontractor and the original contractor," then the latter may withhold from retention up to 150 percent of the estimated value of the disputed amount. (Pub. Cont. Code § 7107(e).) On a private project, if "a bona fide dispute exists between a subcontractor and the original contractor, the original contractor may withhold from that subcontractor with whom the dispute exists its portion of the retention proceeds . . . [not to] exceed 150 percent of the estimated value of the disputed amount." (Civ. Code § 3260(e).)

So, what constitutes a bona fide, or good faith, dispute?

Alpha Mechanical, Heating & Air Conditioning, Inc. v. Travelers Casualty & Surety Company of America (2005) 133 Cal.App.4th 1319, was the first court decision to expressly examine the merits of a good faith dispute on a private work of improvement, analyzing Bus. & Prof. Code § 7108.5 and Civ. Code § 3260. Therein, the court observed "the phrase 'good faith' does have a distinct meaning and purpose in the law," and "suggests a moral quality; its absence is equated with dishonesty, deceit or unfaithfulness to duty," or "that state of mind denoting honesty of purpose, freedom from intention to defraud, and, generally speaking, means being faithful to one's duty or obligation." (Alpha Mechanical, supra, 133 Cal.App.4^th at 1339.)

Alpha Mechanical involved a common dispute over work performed under a subcontract: the general contractor alleged it did not make final payment to its subcontractor because the sub failed to correct defective work and damaged the work of other trades, requiring repairs the general would have to pay for if the subcontractor did not make the repairs. The court of appeals found no evidence in the record suggesting the general contractor "lack[ed] good faith in its belief that the dispute over the damage caused by Alpha justified withholding the remaining sums due it." (Id., at 1340.) Therefore, the general was not liable for prompt payment penalties.

In a more recent case, Martin Brothers Construction, Inc. v. Thompson Pacific Construction, Inc. (2009) 179 Cal.App.4th 1401, a dispute arose on a public work over changes the subcontractor contended were outside its scope of work and for which additional compensation was owed. The general contractor withheld the subcontractor’s retention (over which there was no argument as to the amount owed) due to the dispute over changes. The subcontractor sought penalties under Public Contract Code § 7107 for the general contractor’s failure to release its retention. The court of appeal in Martin Brothers held the reference in the statute to "dispute" meant any dispute, so long as the dispute was bona fide. In other words, even though there was no dispute over the amount of retention owed under the subcontract, the general contractor was justified withholding retention while the change order dispute was pending. The ruling was somewhat surprising to the legal community, because it allowed the general contractor to withhold undisputed sums due to a dispute over whether additional sums were owed.

As you can see from these two examples, whether a dispute is bona fide or in good faith could be interpreted broadly to suggest that nearly any dispute, provided it was genuinely asserted, enabled a general contractor to withhold amounts owed a subcontractor.

But just recently, the good faith dispute exception in Section 7108.5 of the Business & Professions Code (which the court observed was similar to Sections 7107 and 10262.5 of the Public Contract Code and Section 3260 of the Civil Code) was narrowed by a different court of appeal. In the published portion of the opinion in FEI Enterprises, Inc. v. Yoon (2d Dist. 2011) B209862, the court criticized Alpha Mechanical’s “unwarranted and unwise” imposition of a subjective standard, which converted the express language of the statute from a stated "good faith dispute" into a "good faith belief" standard. Unless the factual circumstances dictate otherwise, the FEI Enterprises court held an objective, "reasonable person" standard should be used to determine whether a payment from a contractor to a subcontractor is subject to a "good faith dispute."

Where does that leave the California contracting community? There are now two cases, one in each of the third[1] and fourth[2] districts, applying a subjective standard to the decision of whether a good faith dispute exists to excuse prompt payment, and one case in the second[3] district applying an objective standard to that same question. If your dispute arises in one of these districts, your trial court will likely follow the precedent set by the appellate court in its own district. If the dispute arises elsewhere, it will be difficult to predict how a court will rule. Therefore, applying the more conservative, objective standard is likely the most prudent course to follow when analyzing the facts of your case, and deciding your legal strategy.

[1] The Third District of California’s Court of Appeal is located in Sacramento, and has jurisdiction over appeals arising in Alpine, Amador, Butte, Calaveras, Colusa, El Dorado, Glenn, Lassen, Modoc, Mono, Nevada, Placer, Plumas, Sacramento, San Joaquin, Shasta, Sierra, Siskiyou, Sutter, Tehama, Trinity, Yolo, and Yuba Counties.

[2] The Fourth District of California’s Court of Appeal has courts in Riverside, San Diego and Santa Ana and has jurisdiction over appeals arising in Inyo, Riverside, San Bernardino, Imperial, San Diego and Orange Counties.

[3] The Second District of California’s Court of Appeal has courts in Los Angeles and Ventura, and has jurisdiction over appeals arising in Los Angeles, Ventura, Santa Barbara and San Luis Obispo Counties.

Monday, August 22, 2011

The Last of the Seven Deadly Sins of the Construction Industry: Do You Have an Effective Sales Process?

The Last of the Seven Deadly Sins of the Construction Industry: Do You Have an Effective Sales Process?

Seven Avoidable Mistakes Construction Businesses Commonly Make

In this final installment, will look at whether your business has an effective sales process.

Know your “Top Tier” customers. Define the qualities of your “best” customer, whatever those qualities may be. Evaluate the current and potential sales generated by this group, the cost of acquiring this customer, and the cost of losing this customer. After you’ve done that, determine how this definition affects your profit plan. Your lead generation can be tailored specifically to attract these “best” customers, with the sales and pricing process focusing on encouraging these customers to buy from your company.

Sell effectively to your “best” customers. Don’t leave business on the table because you don’t know your market or your pricing position. If you are selling a commodity with fundamental standards of quality (in which there is no uniqueness to your product, simply a price comparison), then you must distinguish yourself from the competition with your communications and responsiveness, schedule maintenance, and meeting your customer’s delivery expectations. The true value of your product or service when it is otherwise comparable to your competition is what is measured by the customer. You can explain your value added (sometimes known as “service value” or “between the walls” value) to your customer, which helps them understand what they should be looking for from a “top tier” contractor.

Define your “Customer Promise”, and keep it. A “Customer Promise” is your up-front documented and agreed upon statement of the customer’s expectations of your company, its products, and results, as well as what you expect of the customer, including prompt payment, open communications and assessments, etc. The process creates a branding and control process that allows the marketplace to know who you are. The process allows you to secure testimonial letters from your customers, in which they attest that you keep your Customer Promises. It is one thing for you to say who you are or what you do…it is quite another altogether, and far more effective, to agree up front with your client about who and what you are, followed by a customer “report card” at the end. Post your testimonial letters and cumulative scores on your website.

“Hook,” don’t “Sell”. Generally, people and businesses don’t want to be sold. They want their expectations to be fulfilled, and most often they want to buy from someone who can take away the “pain” from previous interactions with vendors. When you are the one asking questions of the potential customer, you are in control of the relationship. On the other hand, when you are the one answering questions, you are not in control. This does not mean that you shouldn’t answer questions, but it’s important to ask yourself why is this customer asking the question he or she is asking. Asking yourself why establishes your interest in the customer; it establishes control; and finally, it touches this pain component of the customer, which is their fundamental basis for decision-making. Intellectualizing will get you little in the way of business. Do not start “selling” the prospect. If you need to talk about your company, do it with an initial statement explaining how you work with customers and what they can expect from you. There are multiple methods of non-selling that work: one is the Sandler Method, which is described in David Sandler’s book “You Can’t Teach A Kid To Ride A Bike At A Seminar.” In the Sandler method, a general series of questions called a “Pain Funnel”, is asked:

a. Is that a problem, or was that experience a problem in the past?

b. Can you be more specific?

c. Tell me more about that?

d. How did this affect you past on a day-to-day basis?

e. How did you try to correct this or mitigate its impact? Did it work? Did you give up trying?

f. How long did you have to deal with this problem? That long?

g. Ball park figure, what do you think the problem cost you in dollars, time and emotional inconvenience? That much? Are you sure?

h. How does that make you feel?

i. Can you see how our company’s process may support your needs?

Sandler’s conclusion for an effective sales process: “Don’t sell, let the customer buy.”

I hope you’ve found this series helpful. Next week, I’ll start addressing contract provisions you should look at closely before closing the deal.

Ideas? Thoughts? Questions? Post a comment and let’s discuss!

Tuesday, August 16, 2011

Contractors State License Board Revokes License of Once- Prominent Sacramento Area Restaurateur and Developer

THIS PRESS RELEASE JUST OUT FROM THE CONTRACTORS STATE LICENSE BOARD:

Settlement requires restitution and repayment by company president

SACRAMENTO – The Contractors State License Board (CSLB) officially revoked the license of Stonegate Construction, Inc.’s license (#766777) on August 12, 2011. Stonegate Construction President and Responsible Managing Officer Abolghassen “Abe” Alizadeh signed and accepted the terms of a stipulated settlement agreement on August 5, 2011, in response to a CSLB investigation that concluded Alizadeh had diverted construction funds, and failed to pay subcontractors and materials suppliers.

As part of the agreement, Stonegate Construction’s license is revoked for at least one year. Before the license can be reinstated, or another license issued to Alizadeh, he must:

· Pay CSLB for the cost of its investigation and enforcement ($16,386.05);

· File a disciplinary bond valued between $15,000 and $125,000 for at least two years; and

· Prove that restitution has been made to subcontractors, or demonstrate that these debts were resolved civilly or successfully discharged in bankruptcy.

CSLB opened its investigation in 2009 after complaints were filed by more than 20 subcontractors and materials suppliers who had not been paid. CSLB partnered with the Franchise Tax Board, Board of Equalization, Employment Development Department, and Division of Labor Standards Enforcement, to whom Alizadeh also owed millions in unpaid fees and taxes. Alizadeh was arrested in January 2011 on grand theft and other felony charges related to that part of the investigation.

“CSLB hopes this sends a clear message that there will be serious consequences for licensees who do not follow state laws,” said CSLB Registrar Steve Sands. “Mr. Alizadeh must be held accountable for these violations of state contracting and other laws before he is ever allowed to contract again.”

The Contractors State License Board operates under the umbrella of the California Department of Consumer Affairs. More information and publications about hiring contractors are available on the CSLB website or by calling 800-321-CSLB (2752). You can also sign up for CSLB email alerts at www.cslb.ca.gov. CSLB licenses and regulates California's more than 300,000 contractors, and is regarded as one of the leading consumer protection agencies in the United States. In fiscal year 2010-11, CSLB helped recover nearly $45 million in ordered restitution for consumers.

Monday, August 15, 2011

The Sixth of the Seven Deadly Sins of the Construction Industry: Ignoring Your Employees

The Sixth of the Seven Deadly Sins of the Construction Industry: Ignoring Your Employees

Seven Avoidable Mistakes Construction Businesses Commonly Make

In the last installment of this discussion, we addressed whether you are working for a profit. In this next to last installment of the Seven Deadly Sins, we will address one of your most important assets: your employees, and what can happen to your business when you ignore them.

Use recruiting and retention methods that work regardless of the kind of person you can afford. You can invoke just as many problems by hiring an expensive person who doesn’t perform, as you can by hiring someone without the experience or qualifications because recruiting the right person is too expensive. In the long run, it is usually more efficient and cost effective to develop internal management and key personnel than it is to look for those people outside of your company. But to do that successfully, you must develop an effective process that is defined, tested, routine, and communicated to the targeted employees. Beyond defining your training processes to the candidates, you must also define your expectations of them, what they should expect of themselves and what is in it for them. Communicating these objectives will help you retain personnel who might otherwise look for opportunities elsewhere.

On the other hand, never follow your “promotion plan” blindly: do not promote someone who is great at his or her current job to a position for which he/she is not fully prepared. You will set that employee up for failure, and in the end, you will lose money and likely your valued employee. An employee who is performing at the top of his/her game, should not have to be promoted to receive more pay. As discussed further below, an employee who is producing for you could make more money than the manager who manages that employee. A manager is there to support those they manage, and to ensure company policies and the business plan are being followed. Develop a rational business culture of communications that confront and coach (not embarrass and punish), coupled with a working pay for performance plan, and you will become a leader in recruitment and retention of valued employees.

Use Pay for Performance plans that work and sell others on your company. A “pay for performance” plan is not Christmas bonuses, or subjective bonuses that become entitlements. Employees should never be left to question what they got, why they received it, why it is more or less than last time, if it was enough, or if it is what they deserve. A true PFP plan establishes measurable standards attributable to the job the person performs with at least one of the measurements dealing with the link between what the employee does and company profit. If what the employee does is not measurable directly to profit (for example, the accounting department), the timeliness and accuracy of what they do weekly and monthly is, as are evaluations monthly or quarterly by their internal customers in other departments. Ultimately the combination of values that set the bonus score is taken as a percentage of the pool created by the percentage of the company profit (which must also be defined), the pool available to the department or profit center, and the pool available to the individual by job classification. The PFP plan is a scorecard that shows the employee how he/she is doing periodically in measurable terms and money. Each company plan should be unique. Each company plan should incorporate standards that support the company goals of revenue, profit, customer branding, and internal culture.

Include middle managers in senior management meetings. It is always useful to include non-management staff in appropriate business meetings to introduce them to the real process of managing the company. It gives them a sense of inclusion, an opportunity to learn, contribute and feel valued. Of course, it is critical to hold a meeting that begins on time, has an agenda, involves participation by attendees, ends on time, and is followed up.

Listen to and respond to suggestions from the field and staff. Employees will often express concern or offer an idea, but there is often no structured response back. The opportunity to coach the employee as to how the business needs to make decisions is lost. Even a simple response such as, “Great idea, but we can’t afford it right now,” provides a teaching moment. If someone has an idea that can be measured against ROI to an amount and timeline, and if the business is willing to take the risk, and the person managing the process or key to it (typically the one making the suggestion) is willing to “take the hit” within their PFP plan if it doesn’t work, then the company should seriously consider taking action on the idea. Conversely, if an employee suggests something that is beneficial to the company and has a measurable effect on the profit of the company or sales of the company, then the employee should be rewarded within the PFP plan or in addition to it based on the measurable gain to the company. In the end, it is always appropriate to say “no” when “no” is explained. It is important to let your employees know you heard them: it is the essence of good management, and keeps the employee from losing his/her emotional investment, which can be measured in lost productivity and profit/revenue loss.

Next week will be the last post in this series, and we will look at whether your business has an effective sales process. Ideas? Thoughts? Questions? Post a comment and let’s discuss!

Tuesday, August 2, 2011

The Fifth of the Seven Deadly Sins of the Construction Industry: Failing to Work for a Profit

The Fifth of the Seven Deadly Sins of the Construction Industry: Failing to Work for a Profit

Seven Avoidable Mistakes Construction Businesses Commonly Make

Last week, we talked about understanding your true cost of doing business. This installment should give you something to think about: are you working for a profit? Sure…that’s the goal, and we all think everyone in the company is on board with that goal. But do you have the necessary checks and balances in place to make sure that is actually what is happening?

Complete production and job reviews regularly. Regardless of your business type, production and job review processes are critical to identifying production issues. These include accurately evaluating work in progress and accrued costs. Such a process creates the feedback required for pricing standards and managing production schedules and related issues, and ensures better accuracy of your monthly financial statements. Working for a profit is all about management: identifying potential issues and mitigating them.

Respond to, and mitigate problems urgently. It serves no purpose to have the needed information, but not mechanism to accomplish an urgent response. Your managers must be able to understand the information in front of him or her, and respond to it immediately. The manager must be able to target when and how the problem will be solved. All too often, the issue is not that a problem occurred, but that the problem is not resolved or mitigated quickly. There is no perfect business. The most successful companies are those who respond to problems, maximize these problems as opportunities by implementing targeted mitigation techniques, and stop making the same mistakes over and over again.

Observe, understand, respond, learn, and then adapt!

The next topic in this series will look at whether you are ignoring the needs of your most valuable asset, your employees.

Ideas? Thoughts? Questions? Post a comment and let’s discuss!