As a construction lawyer, contractor licensing is a very key aspect of my practice. This can include new contractor applications, increase or changes in monetary limits or license classifications, change in ownership or qualifying agent , and, of course, licensing violations.

The recent decision in Incident365 Florida, LLC v. Ocean Pointe V Condominium Association serves as an important reminder for general contractors and subcontractors regarding the significance of proper licensing and thorough contract review in disaster recovery and construction services.

Case Overview

In this case, Incident365 Florida, LLC entered into disaster recovery agreements with several condominium associations (“Associations”) following Hurricane Irma. The agreements involved various tasks such as water damage mitigation, dehumidification, and the removal of unsalvageable materials. However, Incident365 lacked the appropriate contractor’s license when performing the work, which became a focal point in the dispute when the Associations refused to pay the remaining balance of $1 million, citing the absence of the required licensure.

The Associations argued that under Florida law, particularly section 489.128, Florida Statutes, Incident365 was acting as an unlicensed contractor, which made the contracts unenforceable. The Associations contended that Incident365 engaged in significant demolition and repair work, which required a contractor’s license. Without the appropriate licensure, the company could not legally enforce its claims for breach of contract or seek payment for the services performed.

Incident365 countered by arguing that many of the tasks it performed, such as water extraction, dehumidification, and sanitation, did not fall under the statutory definition of “contractor” as outlined in section 489.105(3), Florida Statutes. According to Incident365, these tasks did not constitute “construction,” “repair,” or “improvement” to the structure of the buildings, and therefore did not require a contractor’s license. They maintained that if some services did require a license, only those portions of the agreements should be severed, allowing them to recover payment for the services that did not require a license.

The court found that the statutory definition of a “contractor” under section 489.105(3) was pivotal. It defines a contractor as someone who, for compensation, undertakes activities such as “constructing, repairing, altering, or improving a building or structure.” The Associations asserted that Incident365 was performing activities that constituted repairs or improvements, including removing unsalvageable materials and performing structural dehumidification, which, under the statute, required licensure.

However, the court acknowledged that some of the activities performed by Incident365, such as water extraction, dehumidification, and anti-microbial application, were not clearly tied to building repairs or improvements and may not fall within the scope of work requiring a contractor’s license. Therefore, the court reversed the summary judgment for most of the claims and remanded the case for further proceedings on whether specific activities like structural removal of affected materials required licensure under Florida law. This case highlights key licensing requirements and their critical role in contract enforceability.

Key Takeaways for General Contractors and Subcontractors

This case provides vital lessons for general contractors and subcontractors involved in construction work. Here are three actionable tips to avoid similar legal pitfalls:

1. Ensure Proper Licensing for All Contracted Work

One of the main reasons Incident365 was unable to recover the full amount owed was due to performing work without the required contractor’s license. Under Florida law, services such as repair, remodeling, or any work involving structural components typically require a building contractor’s license.

Tip: Always review your contracts to ensure that the scope of work aligns with your licensure. Subcontractors should also confirm their compliance with licensing requirements before accepting jobs. Some states, like Tennessee, require that only some subcontractor trades have appropriate licensing. Working without the required license can result in unenforceable contracts, jeopardizing payment for completed work.

2. Regularly Review and Revise Construction Contracts

The agreements between Incident365 and the Associations lacked clarity on the severability of tasks that did not require a license. The court touched on whether tasks like water extraction and general dehumidification fell under activities needing licensure. While the trial court’s ruling was reversed for some tasks, the lack of clarity in the contract’s language regarding severability led to further litigation.

Tip: Regularly review and revise your construction contracts to ensure they include clear provisions about the scope of work and any licensing requirements. Including severability clauses can protect your right to recover payment for work that does not require a license, even if other parts of the contract do. Well-crafted contract language is crucial in safeguarding against total contract invalidation.

3. Maintain Detailed Records and Documentation

One of the factors leading to disputes in this case was the ambiguity over whether certain tasks, such as mold remediation or structural removal, required a license. Without detailed records or clear industry standards provided, determining the licensing requirements became a point of contention.

Tip: After reviewing your contract, ensure it includes provisions for keeping thorough records of the scope of work performed. This documentation can help support your case in court if a licensing or payment dispute arises. Detailed records are essential for clarifying whether certain tasks fall under regulatory requirements for licensure.

Conclusion

The Incident365 Florida, LLC v. Ocean Pointe V Condominium Association case serves as a crucial reminder for general contractors and subcontractors to ensure they comply with all licensing requirements, regularly review and revise their construction contracts, and maintain comprehensive documentation to avoid legal disputes that could affect their ability to collect payment. Implementing these practices can provide contractors with the tools they need to safeguard their business operations and financial interests.

Yesterday, I posted about potential construction delays and supply chain challenges resulting from the strike at the East Coast ports, such as New York, New Jersey, Savannah, and Charleston.

A reader asked me about the specific types of construction materials that may be subject to delays. Geographically, the East Coast ports handle a variety of imported construction materials and supplies, especially from Europe, South America, Africa, and sometimes Asia. With the expansion of the Panama Canal, they also receive goods from Asia, though traditionally West Coast ports have dominated Asian imports.

Here are specific construction materials and supplies commonly imported through East Coast ports:

1. Lumber and Engineered Wood Products

  • Plywood and oriented strand board (OSB) from Canada and South America.
  • Laminated veneer lumber and cross-laminated timber (CLT) from Europe.
  • Exotic hardwoods for high-end flooring or millwork from Africa and South America.

2. Stone, Tile, and Flooring Materials

  • Granite, marble, and limestone from countries like Italy, Brazil, and Spain.
  • Ceramic and porcelain tiles from Italy and Spain.
  • Engineered stone and quartz for countertops from Europe and South America.

3. Steel and Metal Products

  • Structural steel and rebar from Turkey, Ukraine, and Eastern Europe.
  • Aluminum extrusions and sheet metal from Europe and Asia.
  • Stainless steel products (such as fittings, pipes, and plates) from Europe.

4. Plumbing Supplies

  • Copper tubing and piping from Europe and South America.
  • Valves, fittings, and fixtures from European and South American manufacturers.

5. HVAC and Mechanical Components

  • Air conditioning units and ductwork components from Mexico, Europe, and occasionally Asian sources (especially from companies with distribution hubs on the East Coast).
  • Boilers and heating systems from Europe, particularly Italy and Germany.

6. Glass and Windows

  • High-performance glass and window systems from Europe, including the United Kingdom, Germany, and Italy.
  • Curtain wall systems and specialized glass products for high-rise buildings from countries like Spain and Belgium.

7. Electrical Equipment and Components

  • Electrical transformers and switchgear from Europe.
  • Lighting fixtures from Italy, Spain, and other European nations.
  • Cables, conductors, and wiring from Europe and occasionally Mexico.

8. Specialty Building Materials

  • Insulation products, such as mineral wool and foam boards, from European manufacturers.
  • Adhesives, sealants, and coatings from Europe, particularly high-performance products for specialized applications.
  • Elevator systems and escalators, often imported from European manufacturers like KONE and Schindler.

9. Fasteners and Hardware

  • Bolts, screws, nails, and fastening systems from Europe and South America.
  • Specialty hardware for doors, windows, and cabinetry from European suppliers.

While West Coast ports dominate Asian imports, East Coast ports play a critical role in handling materials from Europe, South America, and other regions. The materials coming through these ports are often used in both residential and commercial construction, particularly for high-end projects that rely on imported specialty products and finishes. Additionally, the expanded Panama Canal has increased the flow of some Asian goods to the East Coast, though the volumes still generally remain lower compared to the West Coast.

At midnight on October 1, 2024, longshoremen and harbor workers at major East Coast ports went on strike, causing significant disruptions to the flow of goods and materials of all sorts, including those essential for the construction industry. The strike has brought operations at ports like New York, New Jersey, Charleston, and Savannah—key entry points for a wide array of construction materials—to a standstill.

The construction industry relies heavily on imported materials, many of which enter the U.S. through East Coast ports. For contractors, subcontractors, and suppliers, the impact is likely to be felt across the country. Delays in critical shipments can affect project schedules, material costs can dramatically , and the potential for long-term disruptions could be significant. But don’t take my word, just listen to the words of Harold Dagget, the President of the International Longshoremen’s Association, who says the strike will “cripple” the economy, including the construction industry:

What Led to the Strike?

The strike stems from a breakdown in negotiations between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance (USMX), which represents port operators and shipping companies. Central to the dispute are concerns over wages, healthcare benefits, working conditions, and the increasing automation of port operations, which union members believe threatens job security.

After months of failed negotiations, union members at major East Coast ports walked off the job, bringing cargo handling to a halt at some of the most important trade hubs in the U.S. The strike has not only impacted East Coast ports but is also affecting distribution centers and inland terminals that rely on the steady flow of goods through these key ports.

Impact of the Strike on the Construction Supply Chain

With port operations suspended, contractors can likely face delays in the arrival of critical supplies. The materials most likely to be affected by the strike include:

  • Steel and Metal Products: Structural steel, rebar, and sheet metal, commonly imported from Europe, Asia, and South America, are critical for framing, reinforcing concrete, and other foundational elements of construction projects.
  • Lumber and Engineered Wood: While much of the lumber used in construction comes from domestic sources, significant quantities of engineered wood products like plywood, oriented strand board (OSB), and laminated timber are imported from Canada, Europe, and South America. These materials are crucial for framing, flooring, and sheathing in various types of construction.
  • Plumbing Supplies: Copper tubing, PVC piping, and fittings—frequently sourced from Europe and Asia—are essential for the installation of plumbing systems. Delays in receiving these materials can halt mechanical and plumbing work.
  • HVAC Equipment and Electrical Components: Many HVAC units, ductwork components, electrical wiring, switchgear, and transformers are imported, often from China and other parts of Asia. Without these critical components, contractors face delays in installing building systems.
  • Tile, Stone, and Flooring Materials: High-end finishes such as marble, granite, ceramic tile, and hardwood flooring are commonly imported from Europe and Asia. Delays in receiving these finishing materials can impact the final stages of construction projects.
  • Fasteners and Hardware: Nails, screws, bolts, and other hardware, often imported in bulk from international manufacturers, are essential for construction. Even small shortages of these items can cause significant slowdowns.
  • Specialty Construction Materials: Items such as insulation, glass, adhesives, and coatings are also affected, especially custom or specialized products that are difficult to source domestically.

With a large volume of these goods stuck in containers that remain unloaded at East Coast ports, contractors could face delays, increased costs, and shortages, all of which threaten the profitability and completion of projects.

Five Practical Tips for Contractors to Address Supply Chain Disruptions

Although the strike is beyond contractors’ control, there are several steps that can be taken to manage the resulting supply chain disruptions and protect project timelines and budgets:

1. Diversify Your Supply Chain

Relying heavily on East Coast ports for construction materials exposes contractors to significant risk during labor strikes like this one. Consider sourcing materials from alternative ports such as those on the Gulf Coast (e.g., Houston) or even the West Coast. Additionally, explore relationships with domestic suppliers or manufacturers that can provide materials without relying on imports. While alternative sourcing may come with higher costs, it can help mitigate extended delays.

2. Communicate Transparently with Stakeholders

Frequent and clear communication with project owners, subcontractors, and suppliers is essential during supply chain disruptions. Keep all parties informed of potential delays, changes in project timelines, and any new costs that arise due to material shortages. By being proactive in your communication, you can manage expectations, foster trust, and potentially negotiate new deadlines or contract terms to account for unforeseen delays caused by the strike.

3. Review and Adjust Your Contracts

Now is the time to review your contracts to ensure you’re protected against penalties or delays resulting from the strike. Focus on force majeure clauses and provisions related to delays and material price escalation. A well-drafted force majeure clause may offer relief if the strike is considered an unforeseeable event beyond your control. Additionally, consider adding language to future contracts that allows for extensions or price adjustments in the event of supply chain disruptions.

4. Build Up Inventory Where Possible

A “just-in-time” inventory strategy can be risky during times of supply chain instability. Consider shifting to a “just-in-case” approach by stockpiling critical materials where possible. While it may increase short-term expenses, having essential materials on hand can prevent costly project delays later. Evaluate which materials are most critical to your upcoming projects and secure as much of them as you can, even if it means paying more upfront.

5. Seek Legal and Financial Advice

The complexities of a disrupted supply chain may necessitate professional guidance. Consult with legal counsel to review your options for mitigating delays, exploring potential claims, and handling contract disputes related to the strike. Additionally, financial advisors can help manage the strain on cash flow caused by material shortages or increased costs. You may need to secure short-term financing, adjust payment terms with suppliers, or renegotiate contract milestones to maintain financial stability during this disruption.

Managing Supply Chain Disruptions Amid the East Coast Ports Strike

The October 2024 East Coast ports strike is just beginning to cause challenges across the states. Delays in the delivery of key materials, shortages, and rising costs can create a perfect storm for contractors, subcontractors, and suppliers alike. However, by diversifying supply chains, communicating clearly with stakeholders, reviewing contracts, stockpiling critical materials, and seeking professional legal and financial advice, you can mitigate the impact of these disruptions on your projects.

In a groundbreaking move aimed at fostering fair competition and empowering workers, the Federal Trade Commission (FTC) issued a final rule last week to ban noncompete agreements nationwide. This ruling may carry profound implications for the construction industry, prompting construction businesses to reassess their practices and ensure compliance while maintaining competitiveness. Let’s explore how construction companies, large and small, can navigate this regulatory shift effectively.

Understanding the Impact

Noncompete clauses have long been a staple in employment contracts within the construction sector, often used to protect proprietary information and retain skilled talent. However, the FTC’s ban on noncompetes demands a reevaluation of these practices. Employers must recognize the potential consequences of noncompliance, including legal repercussions and reputational damage, and take proactive steps to adapt to the new regulatory landscape.

Communications with Employees

The FTC rule requires employers to provide a form notice of non-enforcement to all present and former employees subject to an unexpired noncompete provisions. However, given the immediate legal challenges to the FTC’s rule and the fact that the 120-day compliance window has not yet begun, there is no reason to take immediate action or begin notifying employees. Instead, business owners should wait for at least 60 days before taking concrete action in response to the rule to see if any court temporarily enjoins the effectiveness of the rule.

Assessing Existing Agreements

Assuming the rule goes into effect, however, it will apply to almost all employers who use noncompete provisions. The first step for employers in the construction industry is to conduct a thorough review of existing noncompete agreements within your workforce. Identify employees who are currently bound by noncompetes and assess the scope and enforceability of these agreements in light of the FTC’s ruling. It’s crucial to understand which agreements may remain enforceable, particularly for senior executives, and which will be nullified under the new rule.

Exploring Alternatives

In the absence of noncompete agreements, construction companies must explore alternative strategies to protect their interests and proprietary information. Consider implementing robust trade secret policies and non-disclosure agreements (NDAs) to safeguard sensitive data and intellectual property, as well as non-solicitation provisions to protect customer relationships. These measures offer effective protection while preserving workforce mobility and fostering a culture of innovation.

Preparing for the Future

As the construction industry adapts to the regulatory changes, employers must remain vigilant and proactive in addressing evolving workforce dynamics. Even if the rule is delayed or nullified for some reason, there has been a move by many states in recent years to limit the use of noncompetes. Stay informed about developments in labor law and regulatory guidance from the FTC to ensure ongoing compliance. Continuously evaluate and refine employment practices to promote fairness, competitiveness, and employee retention in a post-noncompete era.

Conclusion

The FTC’s ban on noncompetes potentially represents a seismic shift in employment practices within the construction industry, which (if deemed lawful) necessitates a swift and strategic action from employers. By understanding the implications of the new rule, limiting communications with employees, and implementing alternative strategies for protection, the construction industry can navigate this transition with confidence. Embracing a culture of fair competition and innovation will not only ensure compliance with regulatory requirements, but also foster a more dynamic and resilient workforce for the future.

In a recent Board decision dated December 13, 2023, the United States Army Corps of Engineers sought to amend its answer in the case of APPEALS OF – KELLOGG BROWN & ROOT SERVICES, INC., under Contract No. W912GB-13-C-0011. The proposed amendment introduces an affirmative defense, contending that Kellogg Brown & Root Services, Inc. (KBR) made material misrepresentations in its proposal, rendering the fully-performed contract void ab initio.

Background: The contract in question, executed on July 9, 2013, was for the construction of an Aegis Ashore Missile Defense System site in Deveselu, Romania, with a firm, fixed-price amount of $134,211,592. The Corps moved to amend its answer to allege that KBR’s material misrepresentations induced the Corps to enter the contract, justifying the voiding of the contract. The alleged misrepresentations include issues related to subcontractor quotes, firm fixed prices, subcontracting plans, and more.

Motion to Amend and Legal Defense: The Corps, despite delays in formally amending its answer, argued that KBR was aware of the potential affirmative defense before the conclusion of fact discovery. The proposed affirmative defense asserts that KBR made eight material misrepresentations in its proposal, upon which the Corps relied in awarding the contract and defending against a GAO protest.

The alleged misrepresentations included:

  1. Inaccurate subcontractor quotes in KBR’s proposal.
  2. Misrepresentation of firm fixed prices and acceptance of subcontract terms.
  3. Misrepresentation of the scope and value of work subcontracted to a key subcontractor.
  4. Failure to self-perform 25% of the total work as required.
  5. Falsely claiming to have submitted a Technical Assistance Agreement to the Directorate of Defense Trade Controls.
  6. Inaccurate calculation of average Romanian labor costs.
  7. Misrepresentation regarding the availability of a Quality Control Manager.
  8. False statements about the small business subcontracting plan.

The Board granted the Corps’ motion to amend its answer to include the material misrepresentation affirmative defense, indicating that this legal defense will be considered on its merits.

Key Points:

  1. Background Knowledge: The decision highlights that the Corps knew about seven of the eight alleged material misrepresentations in 2013 and 2014 while performance was ongoing and became aware of the eighth by 2017.
  2. Jurisdiction and Futility: The decision refutes KBR’s arguments regarding jurisdiction, futility, and the Board’s authority to make findings of fact regarding material misrepresentations. The Board asserts its jurisdiction to hear the material misrepresentation defense without a contracting officer’s final decision.
  3. Undue Delay and Prejudice: While acknowledging the Corps’ significant delay in raising the defense since obtaining knowledge, the decision states that the delay did not rise to the level of extreme delay necessary to deny the motion to amend.
  4. Authority to Make Findings: The decision asserts the Board’s authority to make factual findings regarding material misrepresentation, differentiating it from certain fraud claims beyond the Board’s jurisdiction.
  5. Potential Waiver: The decision leaves open the question of whether the alleged misrepresentations render the contract void ab initio (no waiver) or voidable, which would allow KBR to assert that the Corps waived the defense by accepting performance.

Lessons Learned: This Board decision sheds light on the complexity of legal issues in government contracts, particularly when affirmative defenses such as material misrepresentation are introduced. The Corps ‘ motion to amend its answer opened the door to a thorough examination of KBR’s actions during contract formation and performance, emphasizing the importance of transparency and accuracy in government contract proposals. As the case unfolds, it will be intriguing to see how the alleged misrepresentations impact the overall validity of the contract and whether the defense holds water in legal proceedings.

The construction industry is one of the most complex and challenging sectors. Projects can be highly demanding and require a significant amount of planning and coordination to complete successfully. However, with advancements in technology, specifically the use of artificial intelligence (AI) and chat GBT, the construction industry can experience a transformation in how it operates.

One of the significant challenges in construction projects is the management of data. Information is collected from various sources and needs to be organized and analyzed to make informed decisions. AI can play a significant role in data analysis by providing real-time insights into the project’s progress. This can help in predicting potential delays, identifying areas where cost savings can be made, and even improve safety measures.

Chat GBT, a natural language processing tool, can assist in project management by acting as a virtual assistant to construction managers. The software can be programmed to answer questions about the project, provide updates on the progress, and even suggest solutions to potential problems. This can help in reducing the workload of the project manager and allow them to focus on other critical tasks.

Moreover, AI can be utilized in risk management in construction. With the help of AI, companies can identify potential risks early on and take necessary steps to mitigate them. This can help in reducing the number of accidents and injuries that occur on construction sites. AI can also help in predicting and preventing equipment breakdowns, which can result in significant delays and additional costs.

Another way AI can help in construction is through the use of virtual reality (VR) and augmented reality (AR) technology. With VR and AR, construction workers can visualize the project in a 3D environment, making it easier to identify potential issues and make informed decisions. This can help in reducing the time and resources required to make changes to the project later on.

The use of AI can also help in reducing the cost of construction projects. With the help of AI, companies can identify areas where cost savings can be made, such as optimizing the use of materials and reducing waste. This can result in significant cost savings, which can be passed on to clients.

Do we know the full ramification of AI on the modern construction project? No. However, construction industry partners can use AI, chat GBT and VR to improve project management, reduce risks, and lower costs. As technology continues to advance, it is essential for the construction industry to cautiously embrace AI and fully appreciate the upside and the risk.

Social media has become a powerful tool for small to medium-sized construction companies to generate leads for both residential and commercial projects. With over 3 billion people using social media worldwide, there is a huge opportunity for construction companies to reach potential customers and promote their services.

Following are some tips for contractors to use social media to generate leads and improve their revenue targets in 2023.

Firstly, it is important to choose the right social media platforms. Different social media platforms have different user demographics and can be more effective for certain types of projects. For example, Facebook and Instagram are popular platforms for residential projects, while LinkedIn is more effective for commercial projects. By understanding the target audience and selecting the right social media platforms, small construction companies can improve the effectiveness of their social media marketing efforts.

Secondly, construction companies should use high-quality visuals to showcase their work. Social media is a highly visual medium, and construction companies can use this to their advantage by posting high-quality photos and videos of their past projects. This can help potential customers to visualize the quality of their work and gain trust in the company’s abilities.

Thirdly, construction companies should engage with their audience on social media. Responding to comments and messages in a timely manner can help to build trust and establish a strong relationship with potential customers. Construction companies can also use social media to answer frequently asked questions and provide valuable information about their services and the construction process.

Fourthly, contractors should use social media to highlight their unique selling points. This can include their experience, certifications, awards, or any other factors that set them apart from the competition. By highlighting these factors on social media, construction companies can improve their credibility and attract potential customers who are looking for a trusted and experienced partner.

Finally, in the residential space, construction companies can potentially use social media to offer exclusive promotions and discounts. This can be a powerful way to attract new customers and build a loyal customer base. By offering exclusive promotions on social media, construction companies can also track the effectiveness of their social media marketing efforts and adjust their strategies accordingly.

Social media has become an essential tool for small construction companies to generate leads and promote their services. By choosing the right social media platforms, contractors can improve the effectiveness of their social media marketing efforts and attract more customers. As social media continues to evolve, construction companies should stay up-to-date with the latest trends and adapt their strategies accordingly to remain competitive in the industry.

It’s that time of year again – the holiday season is upon us, and for those in the construction industry, that can mean a few extra challenges when it comes to maintaining efficiency on the job site.

Here are five best practices for dealing with labor during the holiday season:

  1. Communicate early and often: Make sure to clearly communicate any changes to the schedule or workload to your team as early as possible. This will give them time to plan and prepare, and help prevent any potential issues from arising.
  2. Offer incentives: Consider offering incentives to encourage your team to stay focused and productive during the holiday season. This could be something as simple as a bonus or extra time off, or something more creative like a gift card or other prize.
  3. Stay organized: The holiday season can be a busy time, so it’s important to stay organized and on top of your schedule. This means keeping track of deadlines, delegating tasks effectively, and staying in close communication with your team.
  4. Keep safety in mind: Safety should always be a top priority, but it’s especially important during the holiday season when distractions and fatigue can be more common. Make sure to enforce all safety protocols and procedures, and encourage your team to speak up if they see any potential hazards.
  5. Be flexible: Finally, it’s important to be flexible during the holiday season. Your team may have commitments or obligations outside of work, and it’s important to be understanding and accommodating where possible. A little flexibility can go a long way in maintaining a positive and productive work environment.

Overall, the key to maintaining efficiency on a construction project during the holiday season is good communication, organization, and flexibility. By following these best practices, you can help ensure that your team stays focused and productive, even during the busiest time of year.

Today’s guest post is by one of my favorite construction lawyers and friends, Burr partner Ned Nicholson in our Columbia, SC office.  Ned regularly represents clients in construction defect and compensation claims, manufacturer/dealer disputes, and insurance coverage lawsuits. He is also a South Carolina certified mediator. Ned can be reached at nnicholson@burr.com or (803) 799-9800.

If you are a homebuilder, residential housing developer, construction industry insurer, or any one of the many participants in the industry providing affordable and decent housing for the citizens of South Carolina, you are already aware that South Carolina courts have for decades prioritized the promotion of consumer (i.e., home buyer) rights, usually at the expense of the providers of housing.  There is nothing inherently wrong with that; the goal is laudable.  But as in so many things, the implementation has been extremely costly for the residential construction industry as a savvy plaintiff’s bar has taken advantage of grey areas that are inevitably created in our judicial system.

For example, years ago a South Carolina Supreme Court Justice proudly stated that “South Carolina, through both its courts and legislature, has previously been in the vanguard of protecting consumers, particularly in the area of home construction.”  Reynolds v. Ryland Group, Inc., 531 S.E.2d 917, 921 (S.C. 2000).  It is also no secret to builders and insurers that South Carolina’s joint and several liability rules mean that if a builder is only 1% negligent in the cause of construction defects, the builder can still get stuck with 100% of the damages, with the courts leaving it up to the builder to try and collect from other negligent parties.

It is therefore no surprise that in South Carolina, and nationally for that matter, homebuilders have attempted to bring some economic fairness to the table by inserting arbitration clauses in their construction and sales contracts.  Arbitration is a private dispute resolution method where parties to a contract agree that instead of going to court in a public lawsuit, any dispute will be handled by a neutral third party, usually an attorney, in a more informal and less expensive manner than the court system.  Usually the homebuilders attempt to ensure that arbitrators knowledgeable in the construction world will decide such disputes, so that experts truly decide the disputes.

Not surprisingly, plaintiff’s lawyers do not generally like arbitration, as they tend to believe their client homeowners would be more fairly treated by a jury or judge who are not construction experts and perhaps would be more sympathetic to a consumer in a close case.  Because of that, there are constant attacks on arbitration clauses in the courts as owners try to find creative ways to bypass binding arbitration.

Beware!  The South Carolina Supreme Court on September 14, 2022 embraced one of those creative bypasses in Damico v. Lennar Carolinas, LLC, et al, Op. No. 28114.  In Damico, the homebuilder had masterfully integrated special warranty clauses, arbitration clauses, and other contract documents to provide a clear, reliable outline and process for both the home buyer and the homebuilder to follow for dispute resolution by arbitration.  Or so the homebuilder thought.

To the surprise of the builder, the Court held that the arbitration clauses were “unconscionable,” and thus not enforceable.  The only way the Court could reach that conclusion was that the arbitration clause in this case did not say that issues of enforceability of the arbitration clause were for the arbitrator, not the courts, to decide.  (If a clause says that, the court must stop and defer to the arbitrator on that issue.)  Unfortunately for the homebuilder in this case, the elaborate arbitration clause missed that one checkpoint, which opened the door for the Court to attack the clause itself.

And attack it did.  With the adroitness of a prize fighter, the Court bobbed and weaved through various legal barriers that ordinarily may have ended its decision making process and made its way to the unconscionability holding.  The Court seized on the arbitration clause’s joinder provision that provided that the homebuilder at its sole option could join any subcontractors or other potentially liable parties in the arbitration.  The Court held that this seemingly minor procedural issue made the clause unconscionable and unenforceable because normally the plaintiff (home buyer) decides who to sue and this provision took that right away.  The Court believed it also could lead to inconsistent results in other forums and force the homeowner to litigate the same issues in court.

Of course, in the real world, there is almost always a chance of there being many forums.  The homeowner can always sue at fault subcontractors in court under other theories; that happens all the time.  The reasoning of the Court if taken to its extreme could undermine almost any arbitration clause since the home buyer does not have contracts with subcontractors and thus no arbitration clauses.

So how does a homebuilder avoid the trap created by the Court in Damico?  Perhaps a work-around could be if homebuilder includes in every subcontract an arbitration provision that allows a home buyer to demand arbitration against a subcontractor as well as joinder in an arbitration with the homebuilder.   Another way may be the well-known legal maxim of KISS (Keep It Simple Stupid.)  Drafters of arbitration clauses may want to keep the clause very vanilla—for example, beyond the basic language needed to ensure arbitration is applicable to a dispute, let the rules of a national arbitration association govern and do not insert any procedural hurdles that a court could in any way interpret to be unfair in some way to the consumer.  And of course, make sure that the arbitrator, not a court, will determine if a clause if unconscionable or not.

There are other lessons to be learned from Damico, and the homebuilders will certainly face a new round of attacks on their contracts as lawyers and courts start applying the opinion in not just the homebuilder industry, but consumer transactions in general.

This weekend was all about The Rise of Gru.  I love Gru so much that when my children ask for money, my best Gru-like voice belts back: “Now, I know there have been some rumors going around that the bank is no longer funding us….In terms of money, we have no money.”  And that’s precisely what many lenders say on distressed projects when the owner fails to make final payment and the contractor looks to the bank for funding: “We have no money for you contractor!”

In BCD Associates., LLC v. Crown Bank, CA No. N15c-11-062 (Super. Ct. Del, May 2, 2022), the trial court found that when a bank pays a contractor directly, it can create a legally binding relationship subject to the terms of the construction loan agreements with the owner.

The project involved a $13m construction loan between the lender and the owner to renovate a hotel.  The owner and contractor entered into an AIA Contract for the construction management services.  During construction the contractor would submit payment applications to the lender, who would review and approve the invoices for payment.  The lender then would pay 90% of the approved payment application and hold back the remaining 10% as retainage.  The contractor was supposed to be paid the final retainage upon completion, which it did not receive in accordance with the terms of the AIA Contract.

While the contractor asserted numerous claims against the lender—including breach of contract, unjust enrichment, promissory estoppel, and misrepresentation—ultimately the court found that the lender breached contractual obligations owed to the contractor.  Applying New Jersey law, the court held:

The controlling documents are the Loan Commitment and the Loan Agreement. The Court recognizes that [contractor] is not a named party in those agreements. Moreover, the Court acknowledges that the Loan Agreement specifically provides that there are no third-party beneficiaries to the Loan Agreement. But, contractually, factually and practically, [contractor] is the intended third-party beneficiary to the Loan Commitment and the Loan Agreement. Moreover, [owner] and [lender] treated [contractor] as a third-party beneficiary to the applicable agreements.

The court found it important that the lender chose to “cut out the middle man” by paying the contractor directly at all times.  Finally, the court also found sufficient basis to find in favor of the contractor on its unjust enrichment and promissory estoppel claims, but was not able to recover for misrepresentation.

Lessons learned. For contractors, the decision in BCD Associates is a good reminder to look beyond the owner for sources of funding.  Even if the lender on the project says there is no more funding, the bank may nonetheless be on the hook if it has made direct payments to the contractor during the project.  For owners and lenders, be aware that your actions may create third-party beneficiaries despite clear language in the loan documents to the contrary.