The Basics of Construction Law

The Maryland State Bar Association©

MSBA Construction Law Committee

Presented by: Matthew G. Hjortsberg
Nicole Lentini
Michael P. O’Day
Michael J. Pappas
Michael W. Skojec
 What is Construction Law?

Rights and Remedies:

• CONTRACT LAW

• TORT LAW

• COMMMON LAW

• STATUTES

• REGULATIONS
 What is Construction Law?

What Type Of Project Is It?

• Public or Private

RIGHTS AND REMEDIES AVAILABLE TO THE PARTIES ON PUBLIC

PROJECTS ARE GOVERNED BY STATUTE AND PUBLIC CONTRACTS
ARE GENERALLY NOT NEGOTIABLE
 What is Construction Law?

What Type Of Project Is It?

• New Construction or Renovation

RIGHTS AND REMEDIES AVAILABLE TO THE PARTIES ON PRIVATE

RENOVATION PROJECTS ARE LIMITED BY THE MECHANICS’ LIEN
STATUTE
 What is Construction Law?

What Type of Contract Is It?

• PAYMENT
LUMP SUM
COST PLUS FEE
GUARANTEED MAXIMUM PRICE
• DELIVERY METHOD
DESIGN/BID/BUILD
DESIGN/BUILD
CONSTRUCTION MANAGER
AT RISK OR NOT AT RISK
SINGLE PRIME OR MULTI-PRIME
 PROJECT NEED IDENTIFIED BY OWNER

PROJECT DELIVERY METHOD SELECTED

DESIGN PROFESSIONAL INTRODUCED

PROGRAM DEVELOPED BY DESIGNER; BASED ON OWNER INFORMATION

1. Conceptual Phase
2. Schematic Phase
3. Design Development Phase
4. Construction Document Phase
Construction
entity CAN
be CONSTRUCTION
introduced
Close-Out &
Construction
Commissioning
entity MUST
be Warranty Work
introduced

Bidding & Procurement

Owner Use/Move In
Post Construction
Claims
 Damages

The basic rules for determining

the sums of money that a
person is entitled to recover as
compensation to redress
business-related wrongs that
commonly arise in the
construction industry.
 Four Common
Sources of Damages

• Contract Law
• Statutory Law
• Surety/Bond Law
• Public Contract Law
 Claims
MD Prompt Payment Act
Prompt Payment Act – Private Contracts
Md. Code Ann. Real Property Sect. 9-302
If a contract with a private owner, the owner shall:
(i) If the contract does not provide for specific dates or times of
payment, the owner must pay to the contractor the undisputed
amounts owed under the terms of the written contract, within the
earlier of:
 30 days after the day on which the occupancy permit is granted; or
 30 days after the day on which the owner or the owner’s agent takes
possession; or
(ii) If the contract provides for specific dates or times of payment, pay to
the contractor undisputed amounts owed within 7 days after the
date or those specified in the contract.
 Claims
MD Prompt Payment Act
COMAR 21.10.08.00

Prompt Payment for State Construction Contracts

 Subcontractor is due payment 10 calendar days from the

general contractor receiving the payment from State.
 Upon non-payment, subcontractor reports to
procurement officer.
 Within 2 days, procurement officer must determine if an
undisputed amount exists.
 If there is an undisputed amount, contractor must make
payment within three business days.
 If contractor continues to withhold payment, a hearing
will be scheduled.
 Any undisputed amount must be made within 7 business
days of the hearing.
 Claims
MD Prompt Payment Act
Penalties for Failure to Pay
under COMAR

1. Further payments to the contractor not be processed until

payment to the subcontractor is verified;
2. All or some of the work under the contract or subcontractor
be suspended without affecting the contractually required
completion date of the work; and
3. May order the contractor to pay a penalty to the
subcontractor, not exceeding $100 per day from the date that
payment was required.
 MD Construction
Trust Laws
Construction Trust Laws (Md. Real Prop. Code Ann. § 9-201)

(a) Definition: For the purposes of this subtitle, "managing agent" means an employee
of a contractor or subcontractor who is responsible for the direction over or control
of money held in trust by the contractor or subcontractor under subsection (b) of
this section.
(b) Moneys to be held in trust:
(1) Any moneys paid under a contract by an owner to a contractor, or by the owner
or contractor to a subcontractor for work done or materials furnished, or both,
for or about a building by any subcontractor, shall be held in trust by the
contractor or subcontractor, as trustee, for those subcontractors who did work
or furnished materials, or both, for or about the building, for purposes of paying
those subcontractors.
(2) An officer, director, or managing agent of a contractor or subcontractor who has
direction over or control of money held in trust by a contractor or subcontractor
under paragraph (1) of this subsection is a trustee for the purpose of paying the
money to the subcontractors who are entitled to it.
 MD Construction
Trust Laws
Construction Trust Laws (Md. Real Prop. Code Ann. § 9-202)

Misuse:

“Any officer, director, or managing agent of any contractor or

subcontractor, who knowingly retains or uses the moneys held in trust
under § 9-201 of this subtitle, or any part thereof, for any purpose other
than to pay those subcontractors for whom the moneys are held in trust,
shall be personally liable to any person damaged by the action.”
 Claims
Mechanic’s Liens

A claim against the property of the owner

for work performed or materials furnished
for the property.

Positives
Negatives
 Claims
Mechanic’s Liens
Property Subject to Lien
Md. Real Property §9-102

“Every building erected and every building repaired,

rebuilt, or improved to the extent of 15 percent of its
value is subject to establishment of a lien in
accordance with this subtitle for the payment of all
debts, without regard to the amount, contracted for
word done for or about the building and for materials
furnished for or about the building….”
 Claims
Mechanic’s Liens
• Drilling and installation • Waterlines
of wells • Sewage Lines
• Swimming pools • Storm Drains
• Fences • Machine, wharves and
• Landscaping bridges
• Leasing of equipment • Landscaping and
architectural services
 Claims
Mechanic’s Lien
Timing is Key

Calculated from the last day work was performed or

materials furnished

• 180 days to file the lien

• 120 days for subcontractor to serve Notice to
Owner of its intent to file a lien
 Claims
Mechanic’s Lien
Information needed to draft a Notice of Intent
to file a mechanic’s lien and a lien claim:
• Date of last work performed on project
• Address of project (land and building)
• Owner’s real name and address
• Description of work performed
• Total amount billed so far and amount due and
unpaid
 Claims
Mechanic’s Lien
Must be Contained in Petition - Md. Code Ann. Real Prop. §9-
105(a)(1):

• Name and address of Petitioner

• Name and address of owner of subject property
• Description of work done/materials furnished
• New construction or statement that work increased building’s value by 15%
• Dates work was done/materials furnished
• Name of person for whom was done/materials furnished
• Amount claimed (if two buildings with same owner, amount claimed on
each)
• Description of land and description of building

Must be attached to Petition - Md. Code Ann. Real Prop. §9-105(a)(2)-

(3):

• Affidavit of plaintiff setting forth facts upon which lien is based.

• Relevant Material Papers
 Claims
Mechanic’s Liens
 Surety

The legal relation that arises when one party

assumes liability for a debt, default, or other failing
of the second party.
 The Parties

• The Principal
– the entity whose obligation is being assured
• The Obligee
– third party that entered into the contract with the
principal
– is entitled to performance
– has received a bond
• The Surety
– liable for the payment of another’s debt or the
performance of another’s obligation
 Obligations of Surety

If the principal defaults in its obligations, the surety

will be required to perform the obligations it
bonded, as the bond provides.
 Suretyship is Not the
Same as Insurance

• Extends credit rather than indemnifying against

expected losses
• Surety underwriting is based on a presumption of
zero loss.
• If the surety is obligated to make a payment to
the obligee, the surety is entitled to recover that
payment from the principal.
 Basic Principles

• Surety bond is a contract.

• Surety bonds set forth specific dollar amounts or

penal sums.

• Surety bond is a conditional contract.

• The bond references and incorporates the

underlying construction contract into the bond.
 Surety Bonds

• Three main types of surety bonds:

– Bid bonds
– Performance bonds
– Payment bonds (for labor or materials)
 Bid Bonds

• Provides assurance that if the owner awards a

construction contract, the contractor will sign the
contract and provide final bonds.
• If the contractor fails to execute and provide the
final bonds, the surety will pay the owner:
– the amount equal to the stipulated percentage of the
original contract price, or
– the difference between the amount of the defaulting
bid and the next lowest bidder.
 Performance Bonds

• Guarantees to the owner that if the contractor

defaults in performing the contract, the surety
will either cause completion of the work or
provide some other relief.

• Liability of the surety to the owner is contingent

upon the principal’s default and the satisfaction
of any additional conditional precedent set forth
in the bond.
 Payment Bond

• Guarantees that laborers and materialmen will be

paid for their work, materials, and services
provided in connection with the bonded
construction project.

• For public projects, the payment bond provides

subcontractors and suppliers with security for
payment
 Brambel Rule – 338 Md. 195
(2000)

• If a surety fails to respond within the

contractually required time frame, or fails to
include a defense in its response, the surety
waives the right to raise any defense.
 Miller Act/Little Miller Act

• Miller Act
– Federal
– 40 U.S.C. §§ 3134 to 3134
• Little Miller Act
– Maryland
– Patterned after Federal Miller Act
• Look to those cases to determine what is
recoverable
– Md. Ann. State Finance and Procurement §17-101, et
seq.
 Little Miller Act

• The Little Miller Act requires bonds be issued

when a public body awards a construction
contract.
 Little Miller Act

• Labor
– Costs of physical labor performed on the job site
– Only on-site supervision or on-site duties of professional
services are recoverable.
• Materials
– Includes materials or equipment not consumed in the
performance of work, but are “reasonably expected” to be
used up or consumed on the project.
• Rental Equipment
– Rental equipment is covered.
 Notice

• Required to give notice to the prime contractor within 90

days after the labor or materials for which the claims is
made were last supplied in the work covered by the bond.

• The date from which the 90 day period will run is the last
day upon which any work or materials necessary to
complete the contract is performed or furnished.
 Time Requirements for
Bringing Action

• Must be brought no later than one year after the day on

which the last of the labor was performed or material
was supplied by the person bringing the action.
– Returning to the project to compete the repair or corrective
work does not restart the clock.
– Similarly punch lists usually do not extend the time.
• Civil action against a Little Miller Act Payment Bond- filed
within 1 year after the public body accepts the work.
 Schedule
Issues

Project Schedules
Bar or Gantt Schedules
Critical Path Method (CPM)
 Schedule
Issues

CPM Terms
- Critical Path
- Float (or slack)
- Update
- As built schedule
 Schedule
Issues

Who owns the Float?

 Changes

Contract Changes
Owner has the right to make changes and
compel performance only if contract provides
Changes Clause.
 Changes

Construction Change Directives (“CCD”)

Direction to proceed with work before agreement on price
adjustment and/or time adjustment

Minor Changes
Architect or Owner’s representative has the right to order
“minor” changes in the work without adjustment to the
contract price or time
 Changes

Constructive changes
• Changes that are not ordered but caused by occurrences
on the project
• Unreasonable inspections
• Improper rejection of work
• Delays in delivery of needed materials by owner or
Prime
• Restricted site access
• Defective or unclear specifications (if Owner refuses
to acknowledge problem)
 Changes

Cardinal changes
• Fundamental changes beyond the general scope
of the contract
• Dramatic or drastic changes in what was
contracted or how performance to be rendered,
throws out old contract and requires a new one
• Look at totality of the change, magnitude and
quality
• Allows you to stop work until change is resolved
 Changes

Categories of Delay

• Excusable and Compensable Delay

• Non-Excusable Delay

• Concurrent Delay
 Changes

Excusable and Compensable Delay

• Act or omission from Owner or General Contractor
• Changes;
• Defects in specifications
• Lack of Site access
• Result
• Time extension
• Compensation
 Changes

Non-excusable delay
• Delays by contractor
• Non-performance
• Low productivity
• Result
• Compensation to General Contractor and Owner
• Liquidated damages
• Termination
• supplementation
 Changes

Concurrent Delay
• Delays by two parties to the contract
• Result
• No compensation unless there is a clear
apportionment of the delay
• No liquidated damages
• Just time
 Changes

No Damages for Delay Provisions

• Generally Enforceable
Exceptions:
1. Delays due to intentional wrongdoing or gross
negligence by Prime or Owner; or
2. Delays resulting from fraud or misrepresentations
by Prime or Owner
 Changes

Directed Acceleration
Ordered to complete project ahead of completion date
Constructive Acceleration
Failure to adjust contract time for excusable delays
• Contractor ordered, in effect, to accelerate
• Denial of time extension request
• Improper threat to terminate
• Contractor accelerated
• Extra costs incurred
• Labor inefficiency
• Increase in material costs, equipment costs, supervision and/or
overhead
 Key Contract Provisions

Scope of Work
– Describes what it is that the Owner wants to be built
• Plans, specifications, addenda, etc.
– Prime Contractor generally does not perform the actual work
– Scope bust is when Prime Contractor fails to assign all parts of
the job to its subcontractors
Incorporation by Reference
– Binds you to the document as if it were physically part of your
contract
– Flow down provision: transfers risk from the Prime Contractor to
its subcontractor
 Key Contract Provisions

Payment Provisions
– Progress payments: usually on a monthly basis
• Look at type of contract
• Paid based on percentage of completion
• Paid based on actual cost
– Retainage: Owner withholding from Prime Contractor; Prime withhold
from its subcontractors
• Usually 5% to 10% . . . released at Substantial Completion
– Pay when paid: timing of the payment
• Receive payment after the Prime Contractor is paid by the Owner
• Does not excuse Prime Contractor’s obligation to pay for work
properly performed after reasonable time for payment has passed,
EVEN if prime is not paid by owner
– Pay if paid: payment is a condition precedent
• Receive payment only IF Prime Contractor is paid by the Owner for
your work
– Prime Contractor’s right to stop work
 Key Contract Provisions

Damage Waivers
• Mutual waiver of consequential damages
• What are “direct” damages?
• What are “consequential” damages?
• Waiver of subrogation
• Standard waiver in form contracts made by the
insured
• Limit rights of insurers to pursue claims
 Key Contract Provisions

Damage Caps
– Limit liability to certain amount, e.g., the fee
Liquidated Damages
– Actual damages are difficult to calculate
– LD amount is reasonable estimate of likely damages
– Not a penalty
 Key Contract Provisions

Notice and time limits

• When and How a claim is made for extension of time
of increase in price
• Some exceptions to strict compliance with notice
provisions:
• Waiver – intentional relinquishment of known right
• Estoppel – reasonable reliance
• Owner has actual or constructive knowledge
• No prejudice
• Impossibility of performance
 Key Contract Provisions

Differing Site Conditions

1. Type 1: differs materially from what was
“indicated” in the contract; more common
• Anticipate one type of subsurface condition but another
actually exists
2. Type 2: condition is unknown, unusual and differs
materially from those ordinarily encountered in the
performance of that type of work; more uncommon
• Contract silent about soil type and the what is found
varies from what one would reasonably expect
 Key Contract Provisions

Indemnity
– Shifting of loss from one party to another
– Language must be clear and unambiguous; apply
standard rules of construction
– What is covered?
• Broad: all liability, including owner’s sole
negligence (void in Maryland)
• Intermediate: includes partial owner’s negligence
• Limited: covers claims from contractor’s sole
negligence
– Accrual of indemnity claim
 Key Contract Provisions
Warranty
– Express
– Implied
– Manufacturers
– Statutory
– Corrective period
– Statute of Limitations: sometimes altered by contract, e.g.,
when claim accrues or specific length of limitations period
– Statute of Repose: limits liability for latent defects, e.g., bars
claim before it even accrues
 Key Contract Provisions
Completion
– Substantial Completion
• Occupancy
• Punch List Work
• Triggers warranty period
• Retainage
– Final Completion
• Final payment and acceptance of work
 Key Contract Provisions
Termination – procedures for termination strictly enforced,
e.g., notice and cure
1. For Cause/Default:
• Where there has been a material breach as defined by the
contract
• Substandard or defective work
• Failure to pay subcontractors and suppliers
• Limitation on the recovery of damages
2. For Convenience (equivalent of at-will termination):
• Exercised at owner’s discretion
• Required to act in good faith
• Owner pays for work that has been performed and sometimes
part of overhead and profit