March 2006 Issue
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Risk Allocation and Avoidance on Multi-Prime Projects
Why You Should Have a Will
A Timely Foreclosure Action Is Required To Preserve Mechanic’s Lien Rights
Risk Allocation and Avoidance on Multi-Prime Projects
By Patrick M. Miller
Pat concentrates his practice in Construction & Business Law
In today’s complex and highly competitive construction industry, both public and private owners are constantly looking for the most convenient, efficient and cost effective method of completing a project. In turn, the traditional project delivery system of Owner, Architect and Contractor has been widely modified to include systems of design/build, construction management, and multi-prime contracting. This article discusses the risks for both owners and contractors to consider before, during and after the performance of work on a “multi-prime” project.
First Things First: What is “Multi-Prime” Contracting?
A “multi-prime” project is one where the owner enters directly into more than one contract with more than one contractor rather than holding one contract and allowing the general contractor to deliver various portions of the project through subcontracts. This situation presents several unique risks to both owners and contractors that should be considered before entering into such an arrangement.
Legal Implications of “Multi-Prime” Projects
Traditionally, the law does not recognize contract claims between two parties who are not in privity. Thus, where an owner holds separate contracts with more than one contractor, the contractors cannot bring contract claims directly against one another. The one exception to this rule is where the contract expressly states that parties intend to grant rights to other parties (in our example, other general contractors). When this occurs, the parallel prime contractor becomes what is known as an “intended third-party beneficiary” of the other contractor’s agreement with the owner. An intended third-party beneficiary is allowed to enforce the contract as though it were a party to the original agreement.
The Best Time to Assess Risk: Preconstruction Phase
The best time for an owner or contractor to allocate risk is before anyone picks up a hammer or fires up a piece of equipment. For example, if the owner (a) knows that it will be utilizing multiple prime contractors and (b) wishes to avoid being sued by one contractor based on the actions or inactions of another contractor, it should spell out these rights in each of its prime contracts. A typical provision accomplishing this purpose may read something like this:
The contract is executed for the benefit of parallel prime contractors, and Contractor shall endeavor to perform its work without hindering the work of parallel prime contractors. To the extent Contractor hinders or causes damages to a parallel prime contractor, then such parallel prime contractor (by virtue of being a third-party beneficiary of this Contract) shall have the right to pursue a claim directly against Contractor.
Such a provision should be bolstered with disclaimers and indemnification requirements shielding the owner from claims arising out of the conduct of parallel prime contractors. An attorney should be consulted regarding these provisions before entering into a contract. This provision shifts all of the risk from the owner to the various prime contractors. Thus, the owner may no longer be responsible for the harm done to other contractors.
On the other hand, a contractor may wish to avoid claims by parallel prime contractors when it has no way of knowing who the contractor is or what its scope of work for the project might be. In this instance, the contract should disclaim third-party beneficiary rights, and this type of provision may read something like this:
The contract is for the exclusive benefit of the Owner and Contractor and not for the benefit of any third party, except to the extent expressly provided in the contract.
This provision precludes claims by parallel prime contractors against the contractors holding the contract. The risk remains with the owner who will likely be on the receiving end of a claim if the contractor is impacted by a parallel prime. An attorney should be consulted before entering into a contract with such a provision.
What to Do When Your Contract Does Not Create or Disclaim Third-Party Beneficiary Rights
Without such a provision, the courts look to the other terms of the contract to determine whether the parties intended to benefit other contractors. For example, the Indiana Court of Appeals hold that the American Institute of Architects (“AIA”) A201/CMA General Conditions allow third-party claims even though there is no provision to be asserted in the contract expressly creating or disclaiming such rights. The courts look to several factors to determine whether a contract allows claims by one contractor against another, including:
(1) each contract contains substantially the same language;
(2) each contract provides that time is of the essence;
(3) each contract provides for prompt performance and completion;
(4) each contract recognizes other contractor’s rights to performance;
(5) each contract contains a non-interference provision; and
(6) each contract obligates the prime contractor to pay for the damage it may cause to the work, materials, or equipment of other contractors working on the project.
If each of these factors is present in the prime contracts between the owner and various prime contractors, then a prime contractor can pursue a claim against another without involving the owner. When a claim arises against or is received from a parallel prime contractor, the contract should be reviewed for purposes of determining whether these factors are satisfied.
Closing Thoughts
In the end, owners and contractors engaged in multi-prime projects should assess whether they will benefit or suffer from allowing parallel prime contractors to pursue claims against one another. Once this assessment is made, the contract should be reviewed and, if necessary, modified for purposes of tailoring the language to fit the needs of the specific party or project. This assessment and review will go a long way toward allocating risk up front and avoiding unnecessary confusion and complications during or after construction.
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Why You Should Have a Will
By MaryEllen K. Bishop
MaryEllen concentrates her practice in Estate Planning & Administration, Trust Planning & Administration, Probate Litigation, and Individual and Corporate Taxation
Are you avoiding making a Will? Are you unsure of whether you need a Will? Many individuals avoid this essential task. The costs of not having a Will when you die, both practically and economically, can take a substantial toll on your family.
If you fail to make a Will, the state in which you reside at the time of your death writes a Will for you. Every state has laws of descent and distribution (“intestate succession law”) which control the distribution of estate assets for its citizens who die without Wills. These laws vary among states, but be assured that the laws likely do not provide for a distribution in the fashion you envision. Essentially, the legislature in your state, including Indiana, has guessed as to how most people would dispose of their estates.
Most intestate succession laws divide your estate between your spouse and your children (even if your children are minors). If you do not have children, your spouse may have to share your estate with your parents. The intestate succession laws are rigid. They do not provide for any beneficiary who is not your blood relative. Therefore, no part of your estate assets will benefit your friends or favorite charity, unless you make a Last “Will” and Testament.
If you intend to favor your spouse to the exclusion of others; differentiate amongst the treatment of your beneficiaries; establish trust accounts for certain beneficiaries (i.e., minor children); or benefit charity, you must have a Will and/or Trust when you die. Wills can have varying degrees of complexity based upon your objectives as to your family and taxes.
In your Will, you can select your personal representative who will be responsible to administer your estate by gathering your assets, filing your tax returns and then distributing your assets according to the terms of your Will or Trust. Without a Will, the Court selects your administrator. With or without a Will, creditors can also open an estate for you and have themselves appointed as your representative in order to be certain that their claim is properly protected.
Other benefits of having a Will include the ability to establish continuing Trusts for beneficiaries. The Trust may be for the benefit of a second spouse to ensure that upon that spouse’s death, your property will then be transferred to your heirs. A Trust could be established for the benefit of minor or disabled beneficiaries. Without Trust provisions, a minor is entitled to an outright distribution of their inheritance at age eighteen (18). In addition, prior to age 18, a guardian would need to be appointed for the minor in order to manage his inheritance. If you die without a Will and have minor children, the natural parent of those minors will control their inheritance until the minors reach the age of 18.
One of the most important decisions for parents to make in their Will is the selection of a guardian for their minor or disabled children. With or without a Will, the surviving parent is the presumed guardian unless he or she is proved to be unfit. If there is no surviving parent, the Court will give special attention to your selection of guardian as outlined in your Will.
Death taxes can have a substantial effect on intestate estates. State intestate succession laws obviously do no death tax planning for you. Distributions to a surviving spouse are usually death tax-free, but amounts set aside for your other beneficiaries are potentially subject to both Federal Estate Tax and State Inheritance Tax. These taxes can also apply to your life insurance benefits and retirement plan benefits.
A well-drafted Will can greatly reduce the expenses of administration and also streamline the probate process. The Will can provide that no surety bond is required of the personal representative and it can direct that Court involvement be kept to a minimum. A Will can provide substantial comfort in knowing that your family is protected emotionally, legally and economically.
The process of having a Will drawn up does not have to be painful. After selecting a lawyer, you will be asked to fill out a questionnaire regarding your personal data, asset value and asset ownership. You will then meet with your lawyer to discuss planning options and to make essential representative selections. Drafts of the vital documents will then be forwarded to you for your initial review. At that time, a second conference may be scheduled to review any revisions of the documents. The final step is to execute the documents. Wills must be executed with certain formalities and must be signed in the presence of witnesses.
Plan for the benefit of your heirs and for your peace of mind in knowing that family is properly provided for in an organized fashion. Skill and experience are necessary in order to properly prepare a Will in the manner required by law. Be sure to consult with a lawyer experienced in estate planning and probate law. Choose an attorney with whom you have confidence or seek a recommendation from a friend or professional advisor.
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A Timely Foreclosure Action Is Required To Preserve Mechanic’s Lien Rights
By Brian M. Falcon
Brian concentrates his practice in Construction Law and Litigation, Public Contract Law, and Commercial and Business Litigation
All mechanic’s lienholders in Indiana should be aware of a recent 2005 decision from the Indiana Court of Appeals. In Wachstetter v. County Properties, LLC, 832 N.E.2d 574 (Ind. Ct. App. 2005), the Court of Appeals identified the one and only procedural step which will satisfy the Indiana’s mechanic’s lien statute for the preservation of mechanic’s lien rights: the filing of a complaint to foreclose on the lien within one year of recordation. If it was not clear before, Wachstetter serves as a strong caution to all lienholders that they must foreclose within one year or their mechanic’s lien will be void. Nothing else will satisfy the mechanic’s lien statute or suspend its application.
Ind. Code §32-28-3-6 provides, in relevant part, as follows:
(a) A person may enforce a lien by filing a complaint in the circuit or superior court of the county where the real estate or property that is the subject of the lien is situated. The complaint must be filed not later than one (1) year after:
(1) the date the statement and notice of intention to hold a lien was recorded under section 3 of this chapter; …
(b) … if a lien is not enforced within the time set forth in subsection (a), the lien is void.
(emphasis added).
On its face, the statute looks clear enough. However, the otherwise unmistakable statutory language did not stop at least one lien claimant from arguing to the contrary. In Wachstetter, a bank holding a mortgage on a piece of property brought a mortgage foreclosure action on July 16, 1998. On December 1, 1998, a contractor (who was not named by the bank as a party in the mortgage foreclosure action) filed a mechanic’s lien against the same property. The bank later amended its complaint but still did not add the contractor-lien claimant as a party to the litigation. On March 29, 1999, the contractor-lien claimant filed a motion to intervene in the litigation based on its mechanic’s lien but did not file a foreclosure cross-claim on the lien until October 10, 2000, almost two years after the lien was originally recorded. The bank’s assignee then filed a motion for summary judgment against the contractor-lien claimant on the theory that the lien foreclosure cross-claim was untimely per Indiana statute. The Court of Appeals agreed, holding that the contractor-lien claimant failed to comply with the one-year statute.
The contractor-lien claimant argued that its motion to intervene in the mortgage foreclosure action either (a) satisfied the one-year lien perfection enforcement period because it was essentially the equivalent of a complaint, or (b) because it at least served to suspend the one-year time limit for perfection. In rejecting both arguments, the Court of Appeals noted that, “the document ‘specified by [Ind. Code §32-28-3-6]’ that must be filed is a complaint.” Id. at 6. Furthermore, the Court of Appeals issued the following:
“The [mechanic’s lien] statute requires a lienholder to file a complaint to enforce a mechanic’s lien within one year of recording. [The contractor] did not file a complaint within one year. In effect, [the contractor] asks us to hold that a lienholder who takes virtually any legal actions during the applicable timeframe has substantially complied with the terms of the statute. Again, the statute could not be plainer: only the filing of a complaint preserves the right to enforce a mechanic’s lien. Ind. Code §32-28-3-6; (emphasis added). Concluding that filing a motion would satisfy this requirement would be to strip the statute of all meaning, which we shall not do.” Id. at 6.
The mechanic’s lien statute is clear that a mechanic’s lienholder who wishes to preserve his lien rights has but one option: to file a foreclosure action within one year of recordation. Wachstetter not only validates this position but also does so in very direct and express terms. Furthermore, Wachstetter also disposes of any argument that a separate act apart from foreclosure will suspend the running of the one-year perfection requirement.
Mechanic’s lienholders in Indiana must be wary of this decision. Unless you are actually filing a complaint to foreclose on your mechanic’s lien, you risk losing your mechanic’s lien rights under Indiana law.