California General Contractors May Prospectively Waive Lien Claims

Christopher Ng recently posted an interesting article concerning the waiver of a general contractor's priority for its mechanic's lien rights through a subordination agreement with the project lender under California law.

California General Contractors May Prospectively Waive Lien Claims

General contractors are often asked (or required) to subordinate their lien claims by owners and lenders before commencing work on a construction project. It may not come as a surprise to these contractors that such a subordination agreement may be enforceable in most states. In California, however, where the mechanics lien is a constitutional right under the California Constitution, the question of enforceability of such a subordination agreement against a general contractor was not as certain.

In Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company (September 30, 2014), the California Court of Appeals held that, despite the constitutional protection and priority rights accorded to mechanics liens, a general contractor could waive its mechanics lien rights through a subordination agreement with a construction lender.

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California Allows Condo Association to Sue Architects for Design Defects Required by Developer

In a decision which was issued in July, the California Supreme Court in Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP (July 3, 2014, Case No. S208173) upheld a decision by the California Court of Appeal to allow the subsequent condominium owners to sue the design professionals for their condominium for a construction defect caused specifically by a materials choice approved by the developer for the project.  How did the Court reach its decision?

Factual Background

Skidmore and HKS, Inc. served as the architects of record for The Beacon residential condominiums, a property located in San Francisco. The Beacon was designed for eventual sale as condominiums, though the entire community started as rental units for two years prior to the sale. As the opinion points out, the condo association was formed and all the covenants, conditions, and restrictions were recorded before construction on the project ever began. 

Once the condominiums were sold, residents began to complain about "solar heat gain" when the sun was on their particular side of the building. The association alleged in its complaint that Skidmore and HKS approved the use of less expansive, substandard windows that failed to meet local and state building codes. These windows led to the solar heat gain. The Association also alleged that Skidmore and HKS designed a building that lacked adequate ventilation, had excessive water infiltration, inadequate fire separation, structural cracks, and other safety problems.

Procedural Background

The trial court was not impressed with the allegations against the architects and, after the plaintiff's four attempts to plead causes of action with sufficient factual and legal support, the trial court dismissed the complaint. In so doing, the trial court agreed with the architects on two key points. First, the architects argued that they did not owe a duty of care to the Association or its members under the facts as alleged. Second, the trial court placed the onus for the problems on the fact that the architect looked to and relied on the building developer's approvals for the materials used.

The Association appealed this decision to the Court of Appeal, which reversed. The Court of Appeal held that, at the motion to dismiss/demurrer stage and as a matter of law, the architects have a duty of care toward the Association even without privity. The Architects appealed.

The Supreme Court Decision

The California Supreme Court affirmed the Court of Appeal opinion. While citing to a number of products-liability and contractor-negligence cases, the Supreme Court relied heavily on the same case on which the Court of Appeal relied -- Biakanja v. Irving, 49 Cal. 2d 647 (1958). Biakanja was a notary case relating to the witnessing of a will and whether that notary had any duties to third parties in the performance of that duty. The California Supreme Court held that the answer to that question was "yes" and set forth a number of factors to determine whether a professional has a duty to third parties.

That holding in Biakanja served as the main underpinning for this case. The Supreme Court applied the factors from Biakanja as follows:

1. The architects' work was intended to benefit homeowners living in the building that the architect designed;
2. It was foreseeable that the homeowners would be part of a limited class of persons harmed by a negligent design;
3. The Association's members have been damaged because their homes are unsafe and, at times, uninhabitable;
4. Because Skidmore and HKS were the sole architects, there is a close connection between their conduct and the injury suffered;
5. Because the architects played a unique and "well-compensated role" on the project (having been paid over $5 million for their work) and because the architects knew that future homeowners would rely on their specialized expertise, "significant moral blame attaches" to the architects' conduct; and, 
6. Preventing future harm to homeowners reliant on architects' specialized skills is a sufficient policy to recognize a duty of care.

Application

This decision rests in large part on the fact that this case was at the pleading stage and not at summary judgment. However, it provides a roadmap to those seeking to impose a duty of care on an architect for a subsequent purchaser of a property. 

The California Supreme Court refused to allow the architects to avoid potential liability on the basis that the developer of the property had been advised fully regarding decisions to be made during design. Put another way, the court is saying that the architect of record on a project cannot avoid responsibility for design defects by pointing to owner choices. The architect always must design the project properly.  

A Contractor’s Remedies Under the Miller Act May Not Be Conditioned on State-Licensing Requirements.

In a matter of first impression, the United States Court of Appeals for the Ninth Circuit ruled that even though a contractor violated a state law requiring it to have a contractor’s license, the contractor was still eligible to make a claim under the Miller Act on a federal construction project. This decision brings the Ninth Circuit into a general agreement with other federal appellate courts that state law cannot abridge or condition a contractor’s rights and remedies under the Miller Act.

Plaintiff Technica was a subcontractor on a federal project in California. Technica provided almost $900,000 worth of labor and materials, but received less than $300,000 in payments. As a result, Technica filed suit under the Miller Act against the general contractor and its payment-bond surety.

Section 7031(a) of California’s Business and Professions Code precludes a contractor from maintaining an action to collect compensation for its services unless the contractor was licensed during the performance of the contract. Technica did not hold a California contractor’s license. The district court granted summary judgment in favor of the general contractor and the surety, holding that the state-licensing statute barred Technica from pursuing claims for nonpayment under the Miller Act.

In considering the appeal, the Ninth Circuit examined the Miller Act’s strong policy in favor of protecting subcontractors on public projects. Sovereign immunity prevents liens from being placed on public land, so Miller Act bonds are used to provide contractors an alternative means of securing payment on federal construction projects. Moreover, the Miller Act is considered highly remedial in nature and is liberally construed to protect entities that labor and/or provide material to public projects. The remedy provided by the Miller Act was federal in nature and the law that would prevent the unlicensed contractor from recovering was a state law. In addition, the court felt that enforcement of state-licensing requirements against Miller Act claims would “wreak havoc” on the uniform application of federal law, particularly in federal projects spanning multiple states.

The Ninth Circuit focused on the distinction between federal and state law as well as federal preemption in reversing the decision of the district court. It found that the state law could not abridge an entity’s right to pursue a Miller Act claim. The court conceded that while state contract law was sometimes used in evaluating a Miller Act claim, state contract law was not used to affect the rights established by the Miller Act.

This decision was one of first impression. It likely has broad applicability beyond the Ninth Circuit, as many states have contractor-licensing requirements.

Technica LLC ex. rel. v. Carolina Cas. Ins. Co., No. 12-56539, 2014 WL 1674108 (9th Cir. Apr. 29, 2014).