With VA Mechanic’s Liens Sometimes “Substantial Compliance” is Enough (but don’t count on it)

The Supreme Court of Virginia Building, adjace...
The Supreme Court of Virginia Building, adjacent to Capitol Square in Richmond, Virginia (Photo credit: Wikipedia)

Virginia mechanic’s liens are a powerful and tricky beast that in most cases require absolute precision in their preparation.  However, an interesting opinion recently came out of the Virginia Supreme Court that may provide a bit of a “safe harbor” from the total form over function nature of a mechanic’s lien.

In Desai, Executrix v. A.R. Design Group Inc., the Court considered a lien memorandum that had what could be described as technical flaws in the preparation of the mechanic’s lien by A. R. Design Group.  The basic facts are that A. R. Design Group used the form of lien found in Va. Code Sec. 43-5 (also found as Form CC-1512 at the Virginia Judiciary website) when it recorded two lien memoranda for two pieces of property owned by a trust.  Relating to one of the two properties, the memorandum failed to identify the “Owner” as the trustee of the trust.  On the memoranda relating to both properties the affidavit verifying the amounts claimed did not identify the signatory as agent for A. R. Design Group, instead listing the agent as the claimant and further failed to state a date from which interest is claimed or a date on which the debt was due.

Needless to say, the owner argued that each of these technical defects invalidated the memoranda and therefore they should have been released.  Somewhat surprisingly the Fairfax, Virginia Circuit Court disagreed and held the liens to be valid.  On appeal, the Virginia Supreme Court affirmed the lower court.  The held that the failure to add the word “Trustee” after Ulka Desai’s name did not invalidate the lien because the trustee had all of the rights of ownership and furthermore that naming Desai in the memorandum served the purpose of putting third parties on notice of the lien.

As to the naming of a vice president of A. R. Design Group as claimant, the Court held that this was not a “substantial” defect that would cause prejudice to a party or thwart the purpose of the statute.  Because the claimant was properly identified in the lien memorandum itself and it was clear that the person executing the affidavit was an agent of the company, the Court held that this defect was not substantial and held that it fell within the safe harbor of Va. Code Sec. 43-15.

Finally, and more interestingly, the Court found that failure to state a date from which interest could be claimed or a date when the amounts due are or would become payable in this case were not fatal.  As to the interest, the Court stated that in the case before them no interest was being claimed so no date was necessary.  As to the failure to state a date when the amounts claimed are due, the Court looked at the requirements of Va. Code Sec. 43-4 and Va. Code Sec. 43-5 and concluded that because A. R. Design Group used the form found in Section 43-5:

[t]he memoranda were substantially compliant because they closely tracked the form required by Code § 43-5, they provided sufficient notice that the owner was claiming amounts due and any defect in the memoranda would not thwart an underlying purpose of the statute, such as providing notice to third parties. Therefore, A.R. Design is entitled to the safe harbor provided by Code § 43-5.

In short, the Virginia Supreme Court looked at a lien memorandum that had a technical flaw or two and concluded that its substantial compliance with the mechanic’s lien statute and its purpose did not require its invalidation.

Does this case mean that you shouldn’t worry about title searches, proper certification of mailing, and other technical requirements of the lien statutes?  Of course not.  Does this mean that the assistance of a Virginia construction lawyer that is experienced with mechanic’s lien matters is now unnecessary?  Nope.  The Court in this case was looking at a particular set of facts and circumstances.  Frankly, the lien claimant was a bit lucky in my opinion because of the particular confluence of circumstances.  I would still be very careful with mechanic’s liens and would not read this one case as a thawing of the strict requirements of these powerful collection tools.

As always, I recommend that you read the case yourself and draw your own conclusions.  If they are different from mine, I’d love to hear them.

As always, I welcome your comments.  Also, please subscribe to keep up with this and other Construction Law Musings.

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With VA Mechanic’s Liens Sometimes “Substantial Compliance” is Enough (but don’t count on it)

Construction Contracts And Arbitration Provisions: Is The Word “May” Mandatory? Maybe!

You don’t always say what you mean. And you don’t always mean what you say.  In construction contracts, parties attempt to use plain and ordinary words to describe their respective obligations.

As an example, when the parties use the word “shall” in their agreement, they generally understand that the obligation specified is mandatory. Or when parties use the word “may” in their contract, performance is permissive or optional given the plain meaning of the word. Consider the following construction contract provisions:

“If the Owner fails to make payment for a period of 30 days, the Contractor may, after seven days written notice, terminate the Contract and recover from the Owner payment for Work performed.”

“The Work may be suspended by the Owner as provided in Article 14 of the General Conditions.”

“Payments may be withheld on account of (1) defective Work not remedied, (2) claims filed by third parties, or (3) failure to carry out the Work in accordance with the Contract Documents.”

In all of theses examples, it seems clear that the parties agreed to allow—but not require—the specified performance. The word “may” was permissive in nature.

According to some courts, however, this traditional line of reasoning is no longer the trend in the context of arbitration provision in construction contracts. For example, in TM Delmarva Power v. NCP of Virginia, the Supreme Court of Virginia held that the parties’ use of the word “may” in the dispute resolution provisions of their construction contract required mandatory participation in arbitration at the election of one of the parties. The arbitration agreement provided:

“If any material dispute, disagreement or controversy concerning this Agreement is not settled in accordance with the procedures set for in [previous section] . . . then either Party may commence arbitration hereunder by delivering to the other Party a notice of arbitration.”

The court held that the above provision was mandatory at the election of one of the parties: “The word ‘may’ . . . means that either party may invoke the dispute resolution procedures, but neither party is compelled to invoke the procedures. . . . [But] once a party invokes the arbitration provision, the other party is bound to arbitrate.”  The Delmarva court reasoned that the disputes provision would be “rendered meaningless” if the word “may” was interpreted as permissive because parties to a commercial contract can always choose to submit their disputes to arbitration.  The Fourth Circuit reached the same decision in United States v. Bankers Ins. Co.

Given the trend that the courts have interpreted the term “may” as “shall” in the context of arbitration agreements, parties to a construction contract must be careful in understanding both the plain, ordinary meaning and the legal meaning of the particular words used. In the above examples, if the parties wanted arbitration of disputes to be permissive and non-mandatory, they could have clarified their contract by including more explicit language (i.e., “any and all disputes,upon mutual agreement, may be arbitrated” or “with the consent of the other party, either party may commence arbitration”).  It is important in contract drafting that you say what you mean and you mean what you say.

Construction Contracts And Arbitration Provisions: Is The Word “May” Mandatory? Maybe!

Be Sure to Dot All of the “I’s” and Cross the “T’s” in Virginia

English: Logo of the SCC eFile website. Taglin...
English: Logo of the SCC eFile website. (Photo credit: Wikipedia)

As a construction company from outside of Virginia that wants to work here in the Commonwealth, there are numerous “hoops” that you need to jump through to be able to perform work and most importantly get paid.  Among these are obtaining a Virginia contractors license, find a registered agent here in Virginia, hopefully find a local construction lawyer to help with your contracts, and (the subject of this post), register with the Virginia State Corporation Commission for the authority to do business in the Commonwealth of Virginia.

Aside from it being a requirement of state law, the real world consequence of failing to register to do business is that, while you could file a lawsuit to enforce a claim (such as a mechanic’s lien), failure to register could cost you the ability to enforce or obtain any judgment on that lien.  In other words, you could go through the costly litigation process, “win” and then be barred from any recovery simply because you did not follow this step.

As an example of the real world consequences of this statute, a recent case from the Virginia Supreme Court, World Telecom Exchange Comm. LLC v. Sidya, the Court vacated a $2.35 million dollar damage award for the plaintiff because it failed to obtain a certificate of authority to transact business prior to the entry of the final judgment.  While this case involves the telecom industry and does not factually relate to construction, the same principal applies.  Namely, if you are a construction contractor from a neighboring state to Virginia, failing to take the relatively simple steps necessary to obtain such a certificate of authority can have serious consequences.

As always, I welcome your comments below.  Please subscribe to keep up with this and other Construction Law Musings.

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Be Sure to Dot All of the “I’s” and Cross the “T’s” in Virginia

Don’t Forget to Mediate the Small Stuff

A simple statistical mediation model.

A simple statistical mediation model. (Photo credit: Wikipedia)

It’s been a while since I talked mediation here at Construction Law Musings.  Those that read regularly (thanks) have likely missed my musings on the topic.  Those who read this construction blog regularly also know that I am both a Virginia Supreme Court certified general district court mediator and a huge advocate of mediation as a method to resolve construction disputes.  While many of us think of mediation as a method to resolve the major disputes or litigation that occasionally rear their heads in the course of running a construction law practice or construction business, my experience as both a construction attorney and a mediator has taught me something: mediation works for all sizes of cases.

As an advocate for my construction clients, I know that proper trial preparation requires the same diligence and attention to detail for a smaller case as it does for a larger case.   While a smaller case in the Virginia general district court may not have the depositions, written discovery and motions practice that a Virginia circuit court case may have, it still requires witness preparation, document processing and review and many of the other aspects of a larger case.  While construction litigation is never a money maker in the best of circumstances, in the smaller cases the attorney fees often total a larger percentage of the total potential recovery.  For this reason, the small cases are almost better suited for a quick mediated resolution than the larger ones.  The larger cases may cost more to prosecute or defend, but the fees are less likely to eat up such a large percentage of any recovery.

Because of this issue of the cost to recovery ratio, I encourage you to check with the clerk or judge in your local Virginia general district court where you may have a case pending to see if there are mediators like me that can help resolve these matters early and before the costs get out of hand.  Not only do we work for the Court (meaning you don’t have to pay for our time), we are trained and certified to help you out.  Finally, if you’re in Goochland General District Court on a Monday, check out the gallery, you may see me sitting there.

As always, I welcome your comments below.  Please subscribe to keep up with this and other Construction Law Musings.

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Don’t Forget to Mediate the Small Stuff

Update: New VOSH Maximum Penalties as of July 1

As those who read Construction Law Musings know, as a construction attorney, I want to assure that not only are my clients successful in their litigation/dispute resolution endeavors, but that they stay out of trouble.  I take my problem solving and advising roles quite seriously.

As part of this role as advisor, I want to let those that read Musings know that as of July 1, 2017 the Virginia Occupational Safety and Health Administration increased their maximum penalties for safety violations.  The new maximum fines are as follows:

Type Violation                                               Old Penalty          New Penalty

Serious or Other-Than-Serious                       $7,000                     $12,471

Willful or Repeat                                              $70,000                  $124,709

Failure to Abate                                               $7,000/day           Unchanged

Criminal or Willful                                            $70,000                Unchanged

As always, I welcome your comments below.  Please subscribe to keep up with this and other Construction Law Musings.

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Update: New VOSH Maximum Penalties as of July 1

Subcontractors Aren’t Helpless

Food chain in a swedish lake. From the bottom:...

(Photo credit: Wikipedia)

As a construction attorney here in Virginia, I often have the pleasure of assisting subcontractors seeking advice on their all important contracts with general contractors.  I often sense that these subcontractors feel that they are at the bottom of the food chain and don’t have the “clout” necessary to push back at all against the myriad clauses in these contracts that seek to push the risk downhill.  “Pay if Paid” clauses, subordination of lien clauses (which may or may not be enforceable), indemnification language that seems to make the subcontractor liable for way too much, and the dreaded incorporation clauses , would seem to make the subcontractor hold one big “bag of risk” on any construction project.

While this may seem bleak, never fear, as a subcontractor you are not totally helpless.  Remember, you don’t have to take a job from a general contractor that you get a bad feeling about.  Often the best indicator of whether you want to move forward is your “spidey sense” that something seems a bit off or that the GC is trying to cram too much down your throat.  Use your experience in the construction industry to guide your contracting activities.  It is better to avoid the bad job than to take it in the long run.  If you are a quality subcontractor (and I know you are or you wouldn’t be reading this), other work will come along because general contractors need good subs to get their work done.

You can also make certain reasonable changes to the language of most subcontracts presented to you.  In exchange for striking a “pay if paid” clause, you may be able to get the GC to accept a longer payment window (for example instead of 15 days from payment by owner, substitute 45 days from date of proper pay application).  Instead of liability to indemnify everyone for everything “relating to” your work, a simple change to assure any claim is “directly related” to your work and that you are only liable to indemnify for your or “those for whom you may be held liable” can and should be acceptable to a general contractor with whom you are going to do business.  These are just a couple of reasonable changes that can be made and this is not meant to be an exhaustive list.

Of course, these changes must be negotiated before the beginning of work, hopefully with the early advice of a construction attorney.  Once you’ve signed the contract and begun work, the terms of that contract will apply.  This is Virginia after all and the courts of the Commonwealth will enforce contracts as written.

So, in conclusion, you as a subcontractor may not have all of the leverage, but there are ways to make a job less risky.

As always, I welcome your comments below.  Please subscribe to keep up with this and other Construction Law Musings.

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Subcontractors Aren’t Helpless

Spearin Doctrine: A Construction Case Described in A Tweet!

I read in my Twitter feed this morning about a recent case where the Missouri Court of Appeals formally adopted the Spearin Doctrine.

I immediately wondered if I could explain the Spearin Doctrine in less than 140 characters.  Here you go:

US v. Spearin: Owner designs. Contractor builds. Owner accepts. Work sucks. Owner sues. Contractor absolved. Owner loses.

If you live in the government contracting world, don’t start sending me emails about how wrong I have described the Spearin Doctrine above.  Let me expand my statement beyond 140 characters and give you some more information about the 1918 decision in United States v. Spearin:

  • The Facts.  The case involved a contractor who agreed to build a dry-dock in the Brooklyn Navy Yard.  In order to build the dry-dock in the site selected for it, the contractor was required to relocate a portion of a sewer that ran through the specified site. The owner (the United States) provided the plans and specifications for the sewer that was to be relocated.  The contractor completed the work according to the plans and specifications.  The owner approved and accepted the work.  But wait … about a year after the relocation of the sewer, a dam in a connecting sewer caused flooding in the area excavated for the dry-dock. This dam was not shown on the owner’s plans and specifications.  That’s the background and here is my tweet:
  • The Rule. The Spearin Doctrine is legal principle that holds that when a contractor follows the plans and specifications furnished by the owner, and those plans and specifications turn out to be defective or insufficient, the contractor is not liable to the owner for any loss or damage resulting from the defective plans and specifications.
  • Exceptions to the Rule.  In 2007, the Ohio Supreme Court rocked the construction law world by significantly limiting the application of the Spearin Doctrine.  In Dugan & Meyers Construction Co. v. Ohio Dept. of Administrative Services, the trial court applied the Spearin rule in favor of the contractor based upon alleged damages from the impact of an excessive amount of design changes.  On appeal, the Ohio Supreme Court reversed, holding that the Spearin Doctrine did not apply to cases involving delays due to design changes. Rather, the court focused its decision on the “no damages for delay” and “written requests for time extension” clauses in the contract.  Specifically, the court concluded: “We observed that the Spearin Doctrine does not invalidate an express contractual provision.”

What’s the lesson for contractors?  First, make sure you know and understand the “governing law” for your particular dispute, whether it is federal law or state law. Second, make sure you read your contract to understand the notice provisions and changes clause.  Finally, make sure you are documenting any impacts of delays caused by defective specifications or plans.

Spearin Doctrine: A Construction Case Described in A Tweet!