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April 2007 Issue For a print-friendly version, download the PDF. Factors to Consider Before “Double-Breasting” in the Construction Industry No Change Order? No Payment. Recent Case Notes Factors to Consider Before “Double-Breasting” in the Construction Industry By Robert J. Orelup Bob concentrates his practice in Labor and Employment Law as well as Construction Law and Litigation. “Double-breasting” or operating a “dual shop” is when a common owner operates both a union and non-union business. Construction company owners occasionally engage in “double-breasting” to be able to work union shop on some projects and non-union or open shop on others. Much to the chagrin of organized labor, it is perfectly legal for a contractor to conduct business through a “double breasted” company, so long as such operation is for “legitimate business purposes.” UA Local 343 of the United Association of Journeymen v. Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1469 (9th Cir. 1992). A legitimate business purpose would allow for the non-union company to competitively bid jobs that do not require union contractors, while at the same time permitting the union company to bid on jobs requiring union contractors. The theory of such an operation is that union and non-union firms compete in different and separate markets. In such cases, the collective bargaining agreement of the union firm would generally not apply to the open shop firm. However, the National Labor Relations Board (“NLRB”), out of concern that some contractors would use double-breasted operations to avoid their collective bargaining obligations, developed two conceptually related, but distinct theories, to guard against such abuse: “single employer” and “alter ego”. Single Employer Theory Under the “single employer” theory, factors looked at to determine whether the two firms are operating as a single employer, and thus impermissibly attempting to avoid its collective bargaining agreement obligations, are as follows: (1) common ownership, (2) common management, (3) interrelation of operations, and (4) centralized control of labor relations. No one factor is controlling, nor is there a need for all criteria to be present to find a violation. However, the NLRB has stressed factors (2) through (4), particularly the centralized control of labor relations, which can be demonstrated either by showing common control of day-to-day labor matters, or by showing that the person in charge of the union company’s labor relations made the decision that the second company would be non-union. Alter Ego Theory Another theory that the NLRB and courts have utilized to evaluate the legality of a double-breasted operation, at the insistence of labor unions, is the “alter ego” theory. Essentially, in deciding whether one company is the “alter ego” of another, the same criteria are considered as in the single employer test: common or substantially identical ownership, common management, interrelation of operations, and centralized control of employees. However, under the “alter ego” theory, the NLRB looks to see whether the second shop was used “in a sham effort to avoid collective bargaining obligations, rather than for the pursuit of legitimate business objectives untainted by ‘union animus.’” Nor-Cal Plumbing, Inc., 48 F.3d at 1470 (citations omitted). The focus of the “alter ego” theory, unlike the “single employer” theory, is on the existence of a disguised continuance or an attempt to avoid the obligations of a collective bargaining agreement through a sham transaction or a technical change in operations. Consequently, an element of fraud or misrepresentation must exist. Review Collective Bargaining Agreement for Anti-Dual Shop Clause Even if a construction company engaged in “double breasting” or operating a “dual shop“ prevails under the “single employer” or “alter ego” test, the collective bargaining agreement may preclude the owner from establishing a dual shop if it contains an anti-dual shop clause and/or a preservation of work clause. Before opening up a related non-union shop, the owner must review its current collective bargaining agreement for such a clause that might hinder or preclude the development of a related nonunion firm. Anti-dual shop clauses (or work preservation clauses) are designed and intended to assist organized labor by preserving work that was traditionally done by them. Conclusion Construction company owners who desire to engage in “double-breasting” need to be cognizant of the relevant factors looked at in determining whether such “dual shop” was established for a legitimate business purpose or merely to avoid its obligations under the collective bargaining agreement. The initial time and effort necessary to conduct such careful scrutiny before establishment of such operations will be minor compared to that required to respond to potential union grievances and other labor disputes at a later point in time. If you have any questions regarding this article or related matters, please contact Robert J. Orelup at (317)580-4848 or rorelup@drewrysimmons.com. top No Change Order? No Payment. By Joseph M. Leone Joe concentrates his practice in Construction Litigation and Public Construction Law. Constructing a large commercial building is a complex process. It is inevitable that while constructing projects such as these, the contractor will be faced with situations in which extra work is required to complete the construction. These circumstances can include differing site conditions, defective specifications, the architect’s interpretation of plans and specifications, owner initiated changes, or a myriad of other causes. Most construction contracts include a term which contemplates that the contract may only be modified in writing. Therefore, the most important term of the contract, the contract price, will not change except through a change order signed by both parties. American Institute of Architects (“AIA”) Document A201-1997 Ed. contains a typical clause. “The Contract may be amended or modified only by . . . a written agreement to the Contract signed by both parties . . .” AIA A201-1997 ¶ 1.1.1 and 1.1.2. Numerous courts have held that contractors who perform work without a written change order are not entitled to additional compensation for that work where the contract requires changes to be in writing. See Town of New Ross v. Ferretti, 815 N.E.2d. 162 (Ind.Ct.App. 2004); Kern v. City of Lawrenceburg, 625 N.E.2d 1326 (Ind.Ct.App. 1993); Rebekah Assembly I.O.O.F. of Indiana v. Pulse, 47 Ind. App. 466, 92 N.E. 1045 (1910). However, there are exceptions to this general rule. The three primary exceptions to the written change order requirement are 1) the creation of a separate oral contract between owner and contractor; 2) work required by code or state law; and 3) waiver of the writing requirement by the owner. Where the contractor and owner enter into a separate oral agreement for the performance of work outside of the scope of the written contract, a new separate contract is created. Urbanational Developers, Inc. v. Shamrock Engineers, Inc., 175 Ind.App 416, 372 N.E.2d 472 (1978). The oral agreement must contain all elements of a contract in order to be binding on the parties. TRW, Inc. v. Fox Development Corporation, 604 N.E.2d 626 (Ind.Ct.App. 1993); Thatcher Engineering v. Bihlman, 473 N.E.2d 1022 (Ind.Ct.App. 1985). Therefore, the claimant must show an offer, acceptance of the offer, and consideration for a valid oral agreement to exist. In addition, there must be a meeting of the minds as to all material elements of the agreement. In TRW, Inc. v. Fox Development Corporation, supra, Fox, construction manager, and TRW, owner, entered into an at-risk construction management contract for construction of an addition and renovations to TRW’s manufacturing facility. The contract contemplated that Fox would not perform any work itself. During the bidding process, the bids for construction of the concrete walls were significantly over budget. Fox proposed that it would perform the concrete wall construction itself. However, a dispute arose over payment of the amount of the concrete construction. Fox argued that a separate oral agreement existed whereby TRW would pay for the actual cost of the concrete wall construction. TRW countered that it agreed to pay Fox for performing the work but that the guaranteed maximum price was unchanged. The court held that while an oral agreement existed for Fox to perform the work themselves, there was no agreement to increase the guaranteed maximum price of the contract and Fox’s claims for extras were denied. As evidenced by the TRW case, an oral agreement is usually difficult to prove. By definition the agreement is not memorialized in writing, therefore, its proof must be made by the testimony of witnesses. As is usually the case, the witnesses tend to offer different interpretations of the same conversations. However, where the work was required by local code or state law and was not contemplated by the original scope of work, the contractor will be entitled to additional compensation. In Town of New Ross, supra, the Town of New Ross put out for bid the construction of a new fire station. However, the bid package did not contain State-approved plans. Ferretti’s bid, which was incorporated into his contract, noted that there may be additional cost as a result of obtaining state approved plans. The court held that, to the extent changes were required as the result of Ferretti’s adherence to state codes and requirements included in the new plans, he was entitled to additional compensation. It should be noted that the court held against Ferretti on his claims for extras which were not mandated by state law, citing Ferretti’s failure to obtain written change orders for those extras. Finally, the writing requirement may be waived where the owner acts inconsistent with the right to require a writing. Therefore, where the owner directed the contractor to perform work which contractor believed to be extra work and stated that a written work order would be drafted and sent to the contractor at a later date, the court held that the owner had waived the requirement that a change order be in writing by failing to subsequently submit the written work order to the contractor. Oxford Development Corporation v. Rausauer Builders, Inc., 158 Ind.App. 622, 304 N.E.2d 211 (1973). In City of Indianapolis v. Twin Lakes Enterprises, Inc., 568 N.E.2d 1073 (Ind.Ct.App. 1991), the contractor was to perform dredging work under a contract with the City of Indianapolis. The original plans did not identify large obstructions in the area where the dredging work was to be performed. The court held that where the City of Indianapolis and the contractor were negotiating the modification of the contractor’s compensation and the City voluntarily undertook to lower the water level in the reservoir to allow the contractor greater access to the changed conditions, there was sufficient evidence for the jury to find that the City’s actions impliedly modified the contract. Of course, in practice it is much better to insist on a written change order or work directive prior to performing any extra work. Some contractors argue that it is simply too difficult and impractical to wait until they receive a written change order to perform extra work. However, Contractors should heed the court’s warning in Ferretti when it stated, “Ferretti should have either obtained written change orders from the Town Board or refused to perform the additional work that he was under no obligation to perform.” Ferretti, supra at 169. If you have any questions regarding this article or related matters, please contact Joseph M. Leone at (317)580-4848 or jleone@drewrysimmons.com. top Recent Case Notes By Christopher S. Drewry and Kimberly L. Cohen Construction Law Clark v. Hunter, 2007 WL 570411 (Ind. Ct. App. Feb. 26, 2007) The Indiana Court of Appeals addressed the issue of whether or not Indiana Mechanic’s Lien Statute mandates the award of attorneys’ fees upon foreclosure of a lien. The former Mechanics’ Lien Statute provided that attorneys’ fees “shall” be awarded upon foreclosure of a lien; however, the statute was revised in 2002 to provide that attorneys’ fees “may” be awarded. The Court in Clark stated that the legislature made it clear that when it recodified the statute, it did not intend to create a substantive change in the law, and accordingly, it held that attorney fees are mandatory upon foreclosure of a mechanic’s lien. Starks Mechanical, Inc. v. New Albany-Floyd County Consolidated School Corp., 854 N.E.2d 936 (Ind. Ct. App. Oct. 6, 2006) Mechanical and plumbing contractor’s request for additional payment from school corporation for additional costs incurred as a result of the construction project’s engineering deficiencies constituted a “claim,” and thus, under the construction contract, the contractor was required to submit written notice of a claim within 14 days and, in case of a continuing delay, to update the claim on a weekly basis. The request was a demand that sought payment of money, based on a dispute arising out of and relating to the contract. Labor and Employment Law Mitchell v. Universal Solutions of North Carolina, Inc., 853 N.E.2d 953 (Ind. Ct. App. Feb. 28, 2006) An employee’s right to vacation pay under the wage payment statute is not absolute. Rather, an employee is entitled to his/her accrued vacation pay up to the time of termination provided no agreement or published policy exists to the contrary. Helms v. Carmel High School Vocational Building Trades Corp., 854 N.E.2d 345 (Ind. Sept. 27, 2006) Indiana Supreme Court held that the general contractor owed no contractual or legal obligation to the subcontractor’s employee, and thus the general rule that the principal is not liable for the negligence of an independent contractor precluded the imposition of liability on the general contractor for injuries that the employee suffered on the construction site, despite the fact that the building permit required the general contractor to construct the project in compliance with applicable law. If you have any questions regarding these cases or related matters, please contact Christopher S. Drewry (cdrewry@drewrysimmons.com) or Kimberly L. Cohen )kcohen@drewrysimmons.com) at (317) 580-4848 . |
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