Friday, December 9, 2016
Wednesday, November 30, 2016
Friday, November 25, 2016
Supreme Court of Virginia Rules on Prime Contractor’s Flow-Down of Statute of Limitations to Subcontractors and Reaffirms Prior Decision on Enforceability of Indemnity Agreements
by Gretchen M. Ostroff, Esq., Vandeventer Black LLP
WHAT YOU NEED TO KNOW:
In a recent decision, the Supreme Court of Virginia found that general clauses incorporating provisions from the prime contract were insufficient to flow down to subcontractors the open-ended statute of limitations applicable to most public contracts, which can create gaps between a prime contractor’s liability to the owner and what it is able to recover from subcontractors for damages they cause. The Court also reaffirmed that agreements to indemnify a party for its own negligence are against public policy and therefore void in Virginia construction contracts.
On November 3, 2016, the Supreme Court of Virginia issued an important decision regarding subcontract flow down provisions. Hensel Phelps Construction Co. v. Thompson Masonry Contractor, Inc., addresses a contractor’s ability to flow down to subcontractors the open-ended statute of limitations applicable to certain Virginia public contracts and reiterates the Court’s prior ruling on the enforceability of indemnity provisions in construction contracts.
The dispute in Hensel Phelps arose out of a contract for construction of a student health and wellness center at Virginia Tech. As the prime contractor, Hensel Phelps hired several subcontractors to complete portions of the work. Twelve years after final completion, Virginia Tech sued Hensel Phelps to recover costs of repairing defective work on the project. Although Virginia’s statute of limitations on contract claims is five years, the statute of limitations does not apply to the Commonwealth, so claims against a contractor by a state agency—such as Virginia Tech—can be brought at any time.
Hensel Phelps settled the claim and in turn sued the subcontractors and their sureties (referred to in this article collectively as “subcontractors”) for breach of contract and indemnity. The subcontractors filed various motions, including to assert that Hensel Phelps’ claim was barred by the five-year statute of limitations. The trial court granted the motions, dismissing the lawsuit.
On appeal in the Supreme Court of Virginia, Hensel Phelps argued that the subcontractors waived their right to raise the five-year statute of limitations via flow downs in their subcontracts. Each subcontract contained a provision requiring the subcontractor “to assume any and all guarantee or warranty obligations owed by Hensel Phelps to [the owner] arising out of [performance of the subcontract].” Hensel Phelps argued that because it was indefinitely obligated to guarantee and warranty the work, the subcontractors were correspondingly obligated to Hensel Phelps. It also argued that a subcontract clause binding the subcontractors to Hensel Phelps “by the same terms and conditions which [Hensel Phelps] was bound to [the owner] under the Contract” flowed-down the unbounded statute of limitations to the subcontractors.
The Court disagreed, finding that neither of these general incorporation clauses waived the applicable limitations period, because they did not “expressly acknowledge the right to a limitations period or intent to waive that right.” The Court found that the subcontractors were not bound to the statute of limitations waiver in Virginia Code Section 8.01-231 because the subcontracts did not themselves contain a waiver of the statute of limitations and failed to incorporate by reference the waiver in the prime contract.
In an alternate argument, Hensel Phelps argued that its claims against the subcontractors did not arise until it settled Virginia Tech’s indemnification claim (in 2014), and therefore it had sued them within the five-year limit. The Court rejected this argument too. Relying on its prior decision in Uniwest v. Amtech Elevator Services, Inc., the Court found that the indemnification clause in the subcontracts was unenforceable because it required the subcontractors to indemnify Hensel Phelps for its own negligence, which in Virginia is prohibited in construction contracts. Consequently, the Court struck the entire indemnification provision from the subcontracts. Without this provision, the subcontracts imposed no obligation on the subcontractors to indemnify Hensel Phelps with regard to Virginia Tech’s claim. Importantly, the Court found that a properly drafted indemnity clause (compliant with Uniwest) would have preserved Hensel Phelps’ claim against the subcontractors.
The takeaways from Hensel Phelps are that:
1. Prime contractors cannot rely on general subcontract flow down clauses to extend the statute of limitations on claims against their subcontractors to mirror the statute of limitations (or lack thereof) applicable to claims by the owner. Hensel Phelps makes this clear on public contracts—where the statute of limitations does not apply to the Commonwealth or its agencies—but the principle probably applies equally where private parties agree to extend the prime contractor’s liability to the owner past the applicable statute of limitations. Contractors can solve this problem by including properly-drafted, specific indemnity provisions in their subcontracts acknowledging a subcontractor’s intentional waiver of its rights related to the statute of limitations and other issues the contractor wishes to flow down from the prime contract.
2. Contractors should review their indemnity clauses to ensure compliance with Uniwest—specifically the prohibition against indemnifying a party for its own negligence in a construction contract. An indemnity clause that violates this policy will not be reformed by the court to comply with the law—it will be entirely stricken, potentially leaving the prime contractor without recourse against subcontractors for losses they cause.
Hensel Phelps is a reminder to contractors to carefully review prime contracts and subcontracts and to consult with an attorney when negotiating these agreements to help minimize potential risks.
Wednesday, November 23, 2016
Wednesday, July 20, 2016
Thursday, July 14, 2016
Geoff notes that the IRS does not make such calls, and that legitimate IRS contact comes through official written correspondence, with accurate reference to the individual's mailing address, giving notice of the assessed liability, appeal rights, and warnings of impending enforcement. So, the chances are high that any phone call from anyone purporting to be an IRS agent is a scam.
If you receive legitimate correspondence from the IRS it is important to promptly address it, and to seek legal counsel in appropriate circumstances to help you evaluate the assessed liability, to understand your rights, and to develop responsive strategies. Geoff in the example of the type of experienced tax attorney that can provide that type of legal counsel. But there is no need to lose sleep respecting such phony "IRS Agent" phone scams and it is important to not succumb to providing personal information or monies to those types of scammers.
Monday, June 27, 2016
Thursday, June 23, 2016
In a recent opinion involving a fired realtor, the Virginia Supreme Court confirmed that at-will employees can be fired on the spot, without any prior notice to the employee. The decision was unanimous, and noted that while the firing notice “must be reasonable,” advance notice was not required because, among other things, that would be contrary to the flexibility at the heart of the at-will employment doctrine and undermine the indefinite duration which is implicitly an element of at-will employment.
Wednesday, June 8, 2016
SBA Issues Final Rule Regarding Affiliation, Calculation of Annual Receipts, Limitations on Subcontracting, and Joint Ventures
The Final Rule expressly allows certain arrangements without establishing affiliation, while precluding others subject to rebuttable presumptions; including:
- Small Business Teaming Arrangements are allowable without regard to affiliation for “bundled contracts” so long as each team member is small for the size standard assigned to the contract or subcontract.
- Firms owned or controlled by married couples, parties to a civil union, parents, children, and siblings are presumed affiliated if they conduct business with each other or share or provide loans, resources, equipment, locations, or employees; although the presumption can be overcome by showing clear lines of fracture between the concerns.
- SBA may presume identity of interest based on economic dependence if 70% or more of receipts over the previous 3 fiscal years are derived from another concern; although
- the presumption is rebuttable by showing lack of sole dependence; and
- business concerns owned and controlled by an Indian Tribe, ANC, NHO, CDC, or wholly owned entities of an Indian Tribe, ANC, NHO, or CDS, are not considered affiliated by another concern owned by that entity based solely on the contractual relationship between the two concerns.
The Final Rule defines how SBA will calculate annual receipts when determining size. In short, receipts include all revenue (including passive income) from whatever source received or accrued; generally meaning the concern's total income (or gross income for sole proprietorships) plus the cost of goods sold as defined and reported to the IRS. Exclusions are identified in the Final Rule.
Limitations on Subcontracting:
Compliance is now determined by a percentage cap on the total amount of the prime contract paid to first tier subcontractors that are not “similarly situated” entities, instead of the previous limitation based on costs. A similarly situated entity is a small business that participates in the same SBA program that qualified the prime contractor as an eligible offeror.
There is no requirement to apply the prime contract NAICs code to subcontracts. Instead, the prime contractor assigns the code applicable to the scope of work on each subcontract. The percentage limits set by statute are:
- 85% for general construction contracts;
- 75% for specialty trade construction contracts; and
- 50% for service and supply contracts.
The method for calculating compliance with the limitations is complex, depends on whether the contract is for construction, supplies or services, or mixed supplies and services. Among other things, the cost of materials is typically not included, and there are exceptions when “nonmanufacturers” supply the product of a domestic small business manufacturer or processor.
The Final Rule allows a joint venture to qualify as small for any government procurement when each partner to the joint venture qualifies individually as small under the size standard corresponding to the NAICS code assigned by the government in the solicitation.
Under this Final Rule, when an acquisition or merger occurs after the offer date but prior to award the offeror must recertify its size to the contracting officer prior to award.
Wednesday, May 18, 2016
The rule's effective date is December 1, 2016. Some highlights of the final rule that vary from the earlier notice expectations as provided by Vandeventer Black Labor Attorney Anne Bibeau are:
- The new salary threshold is $913/week or $47,476/year.
- The highly compensated employees total annual compensation exemption was raised to $134,000.
- Those amounts will automatically increase every three (3) years beginning January 1, 2020.
- The salary basis test has been amended to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new salary threshold.
- There were no changes to the duties test.
Tuesday, May 17, 2016
Schedule contract holders were given a very short 5 days to review their total offering of products, submit spreadsheets verifying the products' countries of origin, and provide copies of Certificates of Origin or other certification from manufacturers. GSA threatened severe penalties for non-compliance, including removal of the vendor's entire GSA Advantage file.
GSA has confirmed its targeting of those vendors based on the congressional and other complaints about those specific schedules and product. It seems likely, however, that GSA will continue to expand the scope of its targeting to all contractors.
County of origin law compliance entails an often complicated analysis of products' manufacturing processes, including for many products transformation analysis from product origin to the product's later actual commercial use. Despite such complications, both TAA and BAA compliance are vendor responsibilities.
To what extent GSA extends its targeting, and also to what extent other agencies take similar actions to insure TAA and BAA compliance by their vendors and contractors remain to be seen. Vendors and contractors should, however, consider GSA's warning letters as advance notice to evaluate their TAA and BAA compliance, take any necessary corrective actions discovered, and be prepared to promptly address similar future agency notices.
- Federal district courts are given jurisdiction for civil actions under DTSA, although not exclusive jurisdiction. In order for federal jurisdiction to lie, claimants need to show that the trade secret related to a product or service used in or intended for use in interstate or foreign commerce.
- DTSA allows for ex parte seizure provisions, allowing courts to order the seizure of property if deemed necessary to prevent wrongful propagation or dissemination of the trade secret. However, the moving party has to demonstrate extraordinary circumstances warranting the seizure, and provides for defendants to seek damages for abusive or wrongfully-acquired seizure orders.
- DTSA has whistleblower provisions precluding civil or criminal liability under any federal or state trade secret law for disclosures made "in confidence" to a federal, state or local government official, or to an attorney, if solely for the purposes of reporting or investigating suspected violations or in a complaint or other litigation document, if the filing is made under seal.
- Employers are required to provide notice of DTSA's immunity provision in any contract or agreement with an employee that contains provisions governing the use of a trade secrete or other confidential information; applying to all contracts entered into or amended after May 11, 2016. Employee is broadly defined to include independent contractors and consultants.
- DTSA includes provisions intended to address international trade secret theft, including private rights of action.
- DTSA requires the Attorney General to biannually report to the House and Judiciary Committees on international trade secret theft affecting U.S. companies.
Monday, May 9, 2016
The U.S. Department of Labor (DOL) is issuing regulations updating the Fair Labor Standards Act (FLSA). We anticipate that the final regulations will be issued this summer, likely with a 60-day compliance requirement. Under the proposed new regulations, any employee who is paid less than $50,440 per year will be entitled to overtime pay. This change will have a major impact on overtime pay obligations. Companies need to review current policies and procedures now to prepare for timely compliance, and to limit the cost impact of the new regulations.
For example, to qualify as an exempt “executive” an employee, in addition to being paid a salary, must (i) have the primary duty of management of the business or a department, (ii) customarily and regularly supervise at least two other full-time employees, and (iii) have authority or significant influence over decisions to hire or fire.
Under current economic conditions many employers have reduced staff without consideration of the requirement that the exempt employee must supervise at least two other full-time employees. Supervision of workers furnished by a temporary labor agency or workers from another company, such as a subcontractor, does not meet the requirement.
Monday, May 2, 2016
Tuesday, March 1, 2016
The proposed paid leave requirement would apply to new or renewed contracts beginning in 2017. There are some limited exceptions proposed, including for arrangements with Indian tribes and construction contracts under $2,000, and the proposed rule further exempts contractor employees who perform work on a federal contract but also spend at least 80 percent of their weekly hours on other non-contract work.
Also of note, sick leave would carry over from year to year. Service Contract Act and concession contracts are within coverage of the proposed rule, and not just construction contracts.
There is a 30-day public comment period, after which DOL has until Sept 30 to issue a final rule. As of the posting of this blog, the proposed rule is available at the Federal Register website at this link:
Friday, February 12, 2016
Temporary Staffing: Contractor Licensure Depends on Project Location, and the Virginia Requirement Remains Unclear
SUPPLEMENT - February 15, 2016:
As a follow up to this recent blog, we thought it of interest to note that we received comment back from one of our recipients that a VDOL representative had informally expressed the view that the worker misclassification policy was going to be interpreted by VDOL as meaning that the individual works hired from temporary employment agencies did not require licensure.
Wednesday, January 27, 2016
Court Vacates FHWA 90-Percent Threshold and Miscellaneous Products Exemptions Aspects of FHWA Secretary’s 2012 “Buy America” Exceptions Memorandum
Tuesday, January 26, 2016
Monday, January 11, 2016
FINAL REVISED VDOT ROAD AND BRIDGE SPECIFICATIONS PUBLISHED AND AVAILABLE FOR COMMENT
Since the Virginia Department of Transportation (VDOT) proposed changes in 2013 to its Road and Bridge Specifications, Vandeventer Black lawyers have been working with industry representatives to try and initiate a more collaborative process about them. Vandeventer Black lawyer Pat Genzler, as General Counsel for the Virginia Transportation Construction Alliance (VTCA), has helped lead those efforts.
Separately, on December 28, 2015 VDOT announced interim revisions to the 2007 Road and Bridge Specifications would be effective with the First January 2016 Advertisement (January 28, 2016). Those revisions are available in full on the VDOT website at http://www.virginiadot.org/business/const/spec-default.asp.
Despite prior industry input, Final DRAFT includes various changes significantly shifting risks from VDOT to contractors, including among those the following Section 100 changes:
Other changes are also proposed for Section 100, and other sections as well, and more detailed summary respecting the Final DRAFT’s current proposed changes is available at Vandeventer Black’s Construction and Government Contracts Group website at www.vanblacklaw.com.
The impacts of the final version will also depend upon VDOT application of them as project issues arise. But it remains important that all prospective bidders, subcontractors, and suppliers for VDOT projects review the Final DRAFT for how the revisions may affect future bids and proposals, project contract documents, and project management – and provide comments that, perhaps, VDOT will be willing to incorporate into the final revised version.