Build On This!

Steven A. Dimengo recently gave a presentation to the Construction Financial Management Association on Ohio sales and use tax issues for construction contractors. Mr. Dimengo discussed how the Ohio sales and use tax rules pertaining to the construction contracting business affect the construction of real property (various manufacturing facilities, land improvements and related items), the sale and installation of tangible personal property (pumps, storage silos, etc.), and nontaxable services (e.g. excavation, grading and removal of tangible property).

Ohio law requires a contractor to pay sales tax on purchases of materials incorporated into real property. The law also requires a contractor to collect sales tax when the contractor installs personal property which does not become a part of real property. However, in both cases, the law permits certain exemptions from the tax depending on the nature of the project. Identifying real and personal property for the purpose of compliance with the Ohio sales and use tax laws can therefore be very important in the construction field.

Steven A. Dimengo is a shareholder in the Business Law and Taxation & Employee Benefits practice groups at the law firm of Buckingham, Doolittle & Burroughs, LLP.

If you would like a copy of the materials presented by Mr. Dimengo at the Construction Financial Management Association of Ohio, you can download it here. Otherwise, you can reach him directly here.

A recent case, Dugan & Meyers Constr. Co., Inc. v. State of Ohio Dep’t of Administrative Svcs., 162 Ohio App. 3d 491, 834 N.E.2d 1, has serious consequences for contractors. This case arose when a general contractor, Dugan & Meyers Construction Co., Inc. (“D&M”), sought to recover its contract balance and to reverse liquidated damages assessed against it in connection with building Phase II of the Ohio State University’s Fisher College of Business.

The project’s “requests for information” (“RFIs”) contained space for the issuing contractor to indicate any impacts the RFIs were expected to have on the construction schedule or project costs. Notice requirement language in D&M’s contract stated that it was required to request time extensions in writing within ten days of the delaying occurrence, otherwise all claims for extension or mitigation of liquidated damages were waived. Although D&M issued many RFIs, it attributed only 4 days of delay and no cost impacts to its RFIs.

The project became delayed and D&M submitted more RFIs, yet no requests for further time extensions were submitted. D&M was removed from part of the project when OSU concluded that D&M failed to cure various construction issues. OSU took deductions from D&M’s contract price to pay the project’s construction manager who took over for D&M. OSU also assessed liquidated damages against D&M.

The Ohio Court of Claims ruled D&M should recover the balance of its contract and that a complete reversal of the liquidated damages was warranted. D&M was also awarded delay or “cumulative impact” damages based on the Spearin doctrine (holding that contractors are not responsible for the consequences of owner-prepared plans and specification defects). The State of Ohio appealed the decision of the trial court.

On October 26, 2005, the Ohio Supreme Court ruled in Corporex Dev. & Constr. Mgt., Inc. v. Shook, Inc. (2005) 106 Ohio St. 3d 412 that a building project owner cannot sue a subcontractor directly for monetary losses if there is no contract between the owner and the subcontractor.

This case arose from the construction of an Embassy Suites Hotel in Dublin, Ohio. The owner, Dublin Suites, Inc. (DSI), contracted with its “sister company,” Corporex Development and Construction Management, Inc. (Corporex), for the construction of the hotel. Corporex subcontracted all of the concrete work to Shook, Inc. DSI was not a party to the Corporex/Shook subcontract. When the hotel opened 4 ½ months late, DSI and Corporex sued Shook, asserting claims based on breach of contract and on tort claims of negligence and breach of implied warranty.

In a 5-2 decision last week, the Ohio Supreme Court ruled that DSI could not sue Shook directly for economic losses. The Court stressed that Shook owed no independent duty to DSI (in tort or otherwise). In a case such as this, the owner’s only remedy is to sue the contractor. The contractor can then sue the subcontractor for any breaches of its subcontract duties.

DSI had argued that it was a foreseeable beneficiary of the Corporex/Shook contract because Corporex and DSI were owned by the same individual, and Shook knew it. The Court rejected that position, however, out of concern that such an argument would allow any subcontractor to be held liable to a project owner simply because the subcontractor knew the owner’s identity. The Court emphasized that even though Shook knew of the relationship between Corporex and DSI, that knowledge did not impose any independent duties on Shook towards DSI. In addition, the Court noted that although it may be possible to have a relationship that can create liability even where there is no contract, it takes more than merely knowing the name of the project owner to create that relationship. Since Shook owed no duty towards DSI, and Shook was not in contractual privity with DSI (meaning that Shook and DSI did not have a contract with each other), DSI could not assert any claims for monetary damages against Shook.

The decision is generally consistent with prior Ohio Supreme Court rulings addressing what is known as the Economic Loss Rule. That “Rule” provides that in the absence of a contractual relationship one party in a construction project cannot be liable to another for economic damages such as delay related expenses or corrective work costs. The Court has acknowledged that there can be an exception to the Rule where there is sufficient nexus (as in a relationship or interaction between the parties). While the Court in its Corporex v. Shook decision indicated that knowledge about another party’s identity did not create sufficient nexus to overcome the lack of privity to allow a cause of action, the Court did not provide any further guidance on what would create that sufficient nexus.

Janice Casanova is an associate in the Columbus, Ohio office of Buckingham, Doolittle & Burroughs, LLP and a member of the Real Estate and Construction Practice Group. Before joining Buckingham, Ms. Casanova was an associate at Maguire & Schneider, LLP, counsel for DSI, and was involved in preparing the Supreme Court argument for DSI.

Contractors should be aware that the 2005 Ohio Fire Code (OFC) took effect on September 1, 2005. The previously existing code was replaced in its entirety by this new fire code. The 2005 OFC took effect after completing Ohio's legislative review process for administrative rules, which included a July 28, 2005 hearing before the Ohio General Assembly's Joint Committee on Agency Rule Review (JCARR). The 2005 OFC was filed with the Legislative Service Commission, the Ohio Secretary of State and JCARR on August 22, 2005. The newly adopted fire code gives departments more involvement on the ground floor of new buildings before they are built. For more on this story, click here.

Don Leach of the Real Estate and Construction Practice Group was recently elected to the Upper Arlington City Council. Mr. Leach has been involved with the electoral and political process for many years, but election to Council is his first race for office. He was one of the top vote getters and finished ahead of both incumbents on the ballot. Prior to receiving his legal degree, Don was a legislative assistant to the President of the Ohio Senate, and he has been the long time Treasurer for both the Columbus and Upper Arlington School Levy Campaigns. Mr. Leach is a shareholder at the law firm of Buckingham, Doolittle & Burroughs, LLP, and serves as the Managing Partner of the Columbus office.

Mr. Leach was also recently named as one of Ohio’s leading construction law attorneys in the 2005 edition of Chambers USA Guide To America's Leading Lawyers. The law directory is unlike any other US legal directory. Chambers USA researchers conduct over 5,000 in-depth interviews with leading private practice attorneys and key in-house counsel. The directory also contains detailed and independently researched editorials describing each listed law firm and its strengths, details of recent work, quotes from clients and peers, and a list of active clients within each practice.

The American Arbitration Association (AAA) recently announced that its Cleveland Regional Office will close. The Cleveland regional office will maintain a small staff until December 16, 2005 to transition pending cases to their new administrative location in Detroit, Michigan. The AAA provides conflict management and dispute resolution services in a number of fields, including those involving construction and real estate disputes. The Real Estate and Construction Practice Group at the law firm of Buckingham, Doolittle & Burroughs, LLP has represented a number of clients in construction and real estate arbitration matters before the AAA.

The New York Times reported today that buildings in Japan designed according to falsified earthquake safety data will be razed and the government will pay for relocation of residents, according to measures approved by Japan's Cabinet. The $66 million effort was approved amid a broadening construction scandal in the country, and the government will reportedly demand that all companies involved in the sale and construction of the faulty buildings provide compensation.

A federal district judge for the Southern District of Ohio has ruled that Cleveland's "Fannie Lewis Law" violates federal bidding requirements, reports The Plain Dealer. The law required at least 20% of workers on road construction projects to be Cleveland residents. The Federal Highway Administration withdrew $700,000 in funding to the City of Cleveland when the City required compliance with the law. The City sued to recover the funding, but the federal court found that the Fannie Lewis Law violated federal requirements for competitive bidding. The City plans to appeal the decision.

Attorney Don Leach presented a case law update to the Ohio Structural Steel and Architectural Metals Association, Inc., which included a review and analysis of some important recent decision in construction law. The cases include the Ohio Supreme Court's decision affirming the continued validity of the Economic Loss Rule in Corporex Dev. & Constr. Mgmt., Inc., fka Corporex Constructors, Inc.; Dublin Suites, Inc. v. Shook, Inc. (2005), 106 Ohio St.3d 412. Other recent decisions concern the application of a "no damages for delay clause," the application of Ohio's Prompt Payment Act, and the remedies available when a subcontractor submits false lien waiver affidavits. Click here for the full update.

In Circelli v. Keenan Constr. (10th Dist. 2006), 165 Ohio App. 3d 494, Truberry Group was hired to construct a new home for Harold McClune. Truberry served as the general contractor and subcontracted with Keenan Construction to build the frame of the house and with Frank Circelli to install the plumbing. As part of its responsibilities, Keenan installed a temporary prefabricated staircase from the first floor of the home to the basement. The staircase collapsed as Circelli and McClune were descending, and Circelli sustained physical injuries from the twelve-foot fall.

Congratulations to Don Leach (Columbus) and Hank Reder (Cleveland). They were both named "one of Ohio’s leading construction law attorneys" in the 2006 Edition of Chambers USA.

Chambers USA Guide is unlike any other US legal directory. No attorneys are included unless they are strongly recommended by the market. Chambers has over 30 full-time researchers investigating the reputations of leading lawyers throughout the world to produce a global directory. In addition to the global and USA guide, they also focus on the United Kingdom to a produce similar guide to the legal profession.

You can find their listing on http://www.chambersandpartners.com/usa/search.aspx

The Ohio Supreme Court has held that when a municipality violates competitive-bidding laws in awarding a competitively bid project, the rejected bidder cannot recover its lost profits as damages, reports attorney Don Leach. Click here for the full opinion.

In White Hat Management, LLC, v. Ohio Farmers Insurance Co. (9th Dist.), 2006 Ohio App. LEXIS 3211, White Hat, the owner, filed suit against Metro Window and Glass Company and its surety, Ohio Farmers Insurance Company. Metro claimed it had made an error in submitting its bid and refused to sign a written contract after orally being notified that its bid had been accepted. Farmers took the position that it was not liable on the bid bond because Metro was not bound by a written contract. The trial court entered a directed verdict in favor of the defendants on White Hat’s breach of contract claim. The court of appeals reversed, holding that the evidence presented would lead a reasonable person to conclude that Metro and White Hat entered into a contract when Metro was notified that its bid was accepted, even though a written contract was not executed. While R.C. § 153.12 imposes a written requirement, it does not prohibit an oral contract that is later memorialized in writing. The execution of the written contract was a mere formality because the bid documents contained the specific terms that the bidder would be required to accept.

Furthermore, the Court held that the jury had erred in not finding a breach of the bid bond. Metro had argued that White Hat was required to meet a condition precedent—obtaining project financing—prior to making a claim for breach of the bond. The Court, however, held that when Farmers refused to pay on the bid bond, it was an anticipatory repudiation that relieved White Hat from showing proof of financing.

Construction law and business litigation attorney Mark F. Craig reports that the Twelfth District Court of Appeals reversed a trial court decision yesterday, holding that a mediation/arbitration clause in a home construction contract was unenforceable as unconscionable.

In Taylor Building Corp. of America v. Benfield, et al. (August 28, 2006), 12th App. No. CA2005-09-083, 2006-Ohio-4428, the Court reviewed standards of procedural and substantive unconscionability and found that the provision in question was procedurally unconscionable because it was offered on a “take it or leave it” basis by the contractor and the homeowners were not represented by counsel. The Court found that because the contract was a preprinted form contract with many clauses not subject to negotiation, it was a clear example of an adhesion contract. The contractor refused to enter into a contract without the ADR provision. Further, the contractor’s sales representative made statements attempting to minimize the importance and effect of the ADR provision in question.

The Court also found several clauses substantively unconscionable, such as a provision for equitable remedies in favor of the contractor, prohibiting possession of the property before final payment was made, liquidated damages in favor of the contractor, attorneys’ fees provision in favor of the contractor only, additional fees to protect the property from liens. The contract also prohibited the owners from interrupting construction “for any reason whatsoever,” made arbitration mandatory and binding without any indication of the costs and also waived any right to a jury trial. Several provisions also violated public policy and were unenforceable under the Fairness in Contracting Act.

Lesson learned—preprinted form contracts with non-negotiable terms that do not provide a mutuality of obligations, such as a prevailing party provision for attorneys’ fees, may be struck down by the courts for procedural and substantive unconscionability. Contracts, particularly with unsophisticated homeowners, are subject to this inquiry and if they are too one-sided, courts will strike them down as enforceable.

Construction law and business litigation attorney Mark F. Craig reports another decision regarding the enforceability of arbitration clauses in home construction contracts. In Handler v. Southerland Custom Bldrs, Inc. (Aug. 24, 2006), 2006-Ohio-4371, the Eighth District Court of Appeals reversed the Cuyahoga County Court of Common Pleas decision denying a motion to stay litigation and enforce an arbitration agreement in a home improvement contract. The trial court denied the contractor’s motion without opinion.

The homeowner argued that the contract was both substantively and procedurally unconscionable, rendering the arbitration provision unenforceable. The contract was silent on the cost of arbitration. The homeowner provided evidence that the filing fee for arbitration was much higher than that of litigation and therefore argued that the arbitration provision was unenforceable, citing the Ninth Appellate District’s decision in Eagle v. Fred Martin Motor Co. (2004), 157 Ohio App.3d 150, 169-170, 2004 Ohio 829, P47. However, the Court distinguished this case from Eagle because the Eagle plaintiff provided a detailed estimate of the costs and the time that would be incurred due to arbitration which were considered in the context of plaintiff’s income, approximately $20,000 per year. Here, the plaintiff only compared filing fees and provided no other comparative costs.

The Court also rejected the homeowner’s argument regarding procedural unconscionability. The homeowner argued that there was no meeting of the minds because the contractor used a pre-printed form contract. The Court found that there was no evidence that the contract was difficult to understand or that terms were “hidden in a maze of fine print,” as in Eagle. The Court further found that changes had been made to the form contract as a result of negotiations between the parties, including entire sections stricken. This indicated that there was a meeting of the minds and that the contract was not procedurally unconscionable.

Lesson learned—home construction contracts that contain arbitration provisions will be enforceable despite unequal bargaining power and pre-printed form contracts so long as the terms were negotiated and understood between the parties. A homeowner seeking to invalidate a contract because it is silent regarding arbitration costs bears the burden of showing the likelihood of incurring prohibitive costs.

Construction law and business litigation attorney Mark F. Craig reports that a claim of breach of duty to act in a workmanlike manner (defective workmanship) may be an occurrence for purposes of triggering an insurer’s obligation to defend and indemnify under a CGL policy, at least to the extent it includes collateral or consequential damages.

Stansley Group v. Fru-Con Construction Corp., et al., 2006 U.S. Dist. LEXIS 67718 (N.D. Ohio, W. Div., Sept. 21, 2006) provides a great analysis of Ohio law when it comes to insurance coverage issues for defective workmanship on a construction project. The issue in this case is to decide whether Defendant Insurer (Burlington) is obligated under a commercial general liability policy to defend and indemnify Plaintiff Subcontractor (Stansley) for defective workmanship related to the cement it provided to create pylons on a public bridge construction project.

In Al Barto v. Ben D. Imhoff, Inc. (Dec. 11, 2006), 9th Dist. No. 06CA0025, 2006-Ohio-6479, the 9th District Court of Appeals upheld the trial court’s denial of a motion to stay pending arbitration. Barto was the subcontractor (“Sub”) in privity of contract with the general contractor, Ben D. Imhoff, Inc. (“GC”). After a dispute arose, the Sub was terminated and filed a lawsuit seeking payment for services rendered. The GC and project Owner filed a motion to stay pending arbitration, based on an arbitration clause in the GC’s contract with the Owner and a provision in the Subcontract providing that “Contractor shall have the same legal rights and privileges against the Subcontractor herein as the Owner has against the Contractor.” The GC argued that the Subcontract incorporated the arbitration clause by using this language.

The trial court disagreed, holding that a party cannot be compelled to arbitrate a matter when it has not agreed to do so. The Subcontract expressly incorporated only the “specifications, drawings, schedules and addendas prepared by Mitchell Associates, Inc.” into the Subcontract. The parties could have easily incorporated the arbitration provision, all obligations, or even the entirety of the GC’s contract with the Owner, but did not. The Sub never specifically agreed to arbitrate the dispute and the trial court correctly denied the motion to compel arbitration.

Governor Taft today signed into law Substitute House Bill 9, establishing an amended public records law to make state and local government officials more accountable. Click here to see the entire Bill.

Attorney Don Leach reports that H.B. 487 has passed the Ohio General Assembly and becomes effective March 29, 2007. It primarily deals with mechanics' liens on residential work and provides that:

Lien claimants can be liable for attorney's fees when they fail to timely release their residential liens when a homeowner has submitted a "full payment" affidavit (that he has or will pay the homebuilder in full).

Allows a Notice of Commencement on residential construction, but does not require a notice of furnishing from the prospective lien claimant.

Provides that a Notice of Commencement generally expires six (6) years after its filing.

If the Notice of Commencement and Mortgage are recorded on the same day, the mortgage shall be considered recorded first, preserving the lender's priority over lien claimants.

These provisions primarily assist residential construction lenders and title companies.

The Ohio General Assembly has also enacted H.B. 80, requiring that all construction managers, contractors and subcontractors (regardless of tier) be enrolled in a drug-free workplace program to be able to do public construction work in Ohio. The law becomes effective March 29, 2007.

Consequences of a failure to do so include being considered in breach of contract and further can be considered in determining a bidder non-responsible for a five-year period.

Construction law and business litigation attorney Mark F. Craig reports that the Ohio Supreme Court upholds a “no damages for delay” clause in Dugan & Meyers Constr. Co., Inc. v. Ohio Dept. of Adm. Servs., 2007-Ohio-1687. Plaintiff Dugan & Meyers (“D&M”) was terminated on a public project at the Ohio State University and was assessed liquidated damages for 188 days of delay in completion, apportioned between D&M and three subcontractors.

D&M brought suit in the Court of Claims to recover its cost overruns, alleging that the additional costs were due to inaccurate plans and specifications provided by the public owner. The referee in the Court of Claims agreed, finding that under the 1918 U.S. Supreme Court decision, Spearin v. United States, D&M was entitled to rely on the accuracy of owner-provided plans and specifications. The Court of Claims agreed with the referee’s recommendations and granted judgment in favor of D&M.

By James Simon and Donald Leach

In late 2006, the Ohio General Assembly passed H.B. 694, a sweeping reform of Ohio’s campaign finance laws that affects all public contractors and design professionals. This new law severely constrains public contractors’ and design professionals’ ability to make political contributions to officeholders that award bid or unbid public contracts valued over $500. Its impact is not limited to construction related contracts as affected public contracts include all those let by the state, state agencies and political subdivisions, including local governments and appointed boards, agencies and commissions. H.B. 694 imposes harsh sanctions, including criminal prosecution and contract rescission, for contractors that violate its limits.

The provisions of H.B. 694 affect all contributions made after January 1, 2007. Under the new law an officeholder (and all boards, agencies or commissions the officeholder appoints) cannot award a public contract if the officeholder received campaign contributions exceeding $1,000 during the preceding two years from an individual owner, member, partner, 20% shareholder or professional corporation shareholder of a public contractor. The limit includes contributions by owners’ spouses and minor children.

The Supreme Court of Ohio will determine whether the city of Cincinnati can bypass low bidders on a construction project in favor of small and minority owned businesses, reports the Cincinnati Enquirer. Cleveland Construction sued the city after its low bid was rejected in favor of a higher bid from a contractor that used small business and minority subcontractors.