My colleagues and I recently provided key updates on supply
chain disruption, liens, and licensing boards during the firm’s
2021 Construction Conversations Webinar.
In the Rapid-Fire Legal Update session, we covered a variety of
topics relevant to the construction industry, including:
- Dealing with the North Carolina Licensing Board for General
Contractors - Ongoing supply chain issues
- Lien law best practices
- Economic loss rule
This article summarizes the main takeaways.
Licensing Boards
My law partner, Evan Musselwhite, a construction litigator who
advises contractors, subcontractors, owners, and design
professionals about the construction and development process,
started the session with important considerations for general
contractors dealing with a licensing board complaint. Before
delving into these issues, Musselwhite provided an overview of the
intricacies of when a general contractor’s license is required
and the importance of strictly following licensing regulations.
Aside from the Board having the ability to restrict, suspend or
revoke a license, Musselwhite said another negative outcome could
result from failing to pay careful attention to licensing rules and
regulations.
A contract is generally unenforceable by the general contractor
if it does not have the required license. Strict compliance with
the licensing rules and regulations, not substantial compliance, is
the rule.
“The courts here consider that an illegal contract,”
said Musselwhite. “That means if you complete the entire
project and do all the work perfectly, that owner doesn’t have
to pay you, and you can’t go to the courts to enforce that
contract to try to get paid.”
Some view this as a very harsh result, especially from a
collectability standpoint. “A lot of times, this is a big
windfall for owners, but that is just the way the courts have
interpreted these regulations because they feel they deal with the
health and safety of the public,” Musselwhite explained.
The question of who actually needs a license is more complex
than it seems. “Every corporation, partnership, and LLC has to
have its own license in its own name if it’s practicing general
contracting within the state,” noted Musselwhite.
He added that, in general, each member of a joint venture has to
have a license. “Sometimes there can be confusion over an
unlicensed entity wanting to team up with a licensed contractor to
do a project under a joint venture and thinking if we team up with
them and they are licensed, then we are OK, but that is
not how it works,” said Musselwhite. To avoid
disciplinary action, each joint venture member would require a
license, or the joint venture itself could obtain its own
license.
As far as what the Board is looking for when it gets a
complaint, the bases for disciplinary action include:
- Unauthorized practice of general contracting
- Fraud or deceit in obtaining a license
- Gross negligence, incompetency, or misconduct in the practice
of the profession - Willful violation of licensing statutes
Musselwhite explained that it is important to cooperate with the
Board when faced with a complaint. “It’s important
to be proactive about a complaint; keep and maintain all records,
and don’t try to defend an indefensible position,” advises
Musselwhite. “One of the worst things to do is to try to cover
something up or make a misrepresentation to the Board, as it’s
much more likely to have a harsh consequence.”
Honesty is the best policy when dealing with the North Carolina
Licensing Board for General Contractors. Some issues may have
originated from a simple mistake or oversight that can be explained
to the Board. Musselwhite explains: “The Board wants
acknowledgment of a mistake, if there was one, someone to take
responsibility for it, and what steps you will take to ensure that
the issue doesn’t happen again.”
Supply Chain Issues
As a business attorney with decades of experience representing
contractors, design professionals, and project owners, I have
increasingly fielded a multitude of questions about dealing with
supply chain disruption in recent months. As noted, “[t]he
global pandemic has caused shortages of materials, components, and
equipment at a level most of us have never seen, and this has
caused rapidly escalating prices, unpredictable delivery times and
ultimately, more risk for contractors and subcontractors.”
The mindset of doing business as usual is simply not going to
work anymore. To help contractors and subcontractors adapt to the
modern business environment, I provided a number of steps for
minimizing risk, including:
- Communicate early and often about supply chain issues, set
clear expectations - Provide for price increases in the contract based on market
changes - Use allowances for volatile materials that could fluctuate in
price - Work with the owner(s) to buy materials in advance
- Include material shortage as a reason for additional time or
delays
“If you can educate all the parties, they may be convinced
to do things differently. We need to recognize the market we’re
in and create specific carve-outs in contracts for problems related
to epidemics, pandemics, and material shortages.”
Lien Law Update
Luke Tompkins, a commercial litigator,
provided guidance and best practices for navigating lien laws.
Tompkins noted that there have been no significant changes to
North Carolina lien laws since 2013 when lien agent requirements
were added. He advised contractors to post building permits and
lien agent information conspicuously on the job site.
Also, contractors and subcontractors should serve a notice to
the lien agent no later than 15 days after furnishing labor or
material at the job site. Failing to do so shifts the priority of
any lien claims from the date of first furnishing to the date where
the lien is actually filed and perfected.
“This can have vast consequences because if other
subcontractors do this process correctly and get everything in
place before you file your lien, and you didn’t serve the
notice to the lien agent, you could lose your ability to
recover,” Tompkins explained.
To be safe, Tompkins recommended that, “Every time you
begin work on a project, get the lien agent information, serve that
notice to the lien agent and maintain proof that you served the
lien agent by using certified mail or another method of service by
which you can show receipt of service.”
Tompkins also strongly suggests that contractors post and file a
notice of contract to guard against the threat of double payment.
On the other hand, subcontractors should check to see if a notice
of contract has been posted on the job site and, if so, should
serve the contractor with a notice of subcontract to preserve their
right to file a lien on real property.
Lastly, Tompkins emphasized the importance of asserting lien
claims in a timely fashion. A lien on real property must be filed
within 120 days of the last furnishing of work or materials and
enforced by legal action within 180 days of the last furnishing.
Waiting until the last minute to file and enforce your lien on real
property can result in a loss of your claim. Likewise, it is
paramount to give notice of a claim of lien on funds as soon as it
becomes clear that a payment is late and not forthcoming.
Economic Loss Rule
Bill Durr, a construction litigator, weighed
in on a recent North Carolina Supreme Court decision addressing the
application of the economic loss rule.
In the case, Crescent University City Venture, LLC v.
Trussway Manufacturing, Inc., a commercial property owner
brought a lawsuit against a general contractor and the manufacturer
of the trusses used in the project.
“As is often the case, this dispute involved a property
owner looking for as many deep pockets as they can possibly
find,” said Durr.
The owner sought to make a direct claim against the truss
manufacturer, alleging the trusses were negligently
manufactured. The North Carolina Supreme Court affirmed the
ruling from the Business Court, holding that the only means of
recovery would be against the general contractor since there was no
contract between the owner and manufacturer.
“This decision clarifies the applicability of the economic
loss rule in the context of commercial construction projects,
especially where the property owner is an experienced real estate
developer,” added Durr.
Questions and Answers
At the close of the webinar, the moderator opened the floor for
questions. One attendee wanted to know: “Can I fire an
employee for refusing to wear a mask while working?”
“Yes, if you go through the right process,” said Emily Massey, a labor and employment attorney.
“The first question to ask is, ‘Is this for a medical or
religious accommodation?’ We have seen terminations happen: the
key is to engage legal counsel, have multiple conversations, and
document the process.”
Another attendee asked, “Does the economic loss rule apply
to single-family homes?”
“I think you can argue it does apply,” said Durr.
“I think the courts would look at whether there is a right of
recovery in the contract. Courts will take a firmer view in regards
to a commercial contract, but they may give the benefit of the
doubt to a homeowner with less experience negotiating contract
terms.”
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to the subject matter. Specialist advice should be sought about your
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