VB CGC Practice Group

VB CGC Practice Group
Vandeventer Black's Construction and Government Contracts Practice Group focuses on serving our business clients in the construction industry. We currently have offices in Norfolk and Richmond, VA, the OBX and Raleigh, NC, and Hamburg, Germany. For more information about Vandeventer Black, clink on the VB logo.

Wednesday, November 30, 2016

Vandeventer Attorney Jim Cosby Part of Arbitration Seminar Faculty

Vandeventer attorney Jim Cosby is one of a number of distinguished faculty members participating in a continuing legal education program for Virginia CLE regarding arbitration in today's environment. The program has live (December 12, 2016) and webcast availability or phone (January 19, 2017) availability. For more information, use the below link:

Friday, November 25, 2016

Virginia Supreme Court Rejects Contractor's Argument of Subcontractor Flow Down Liability

The Virginia Supreme Court recently rejected a contractor's flow down liability claim against its subcontractors for a state construction project and defect claims asserted by the state against the contractor after the passage of the five year statute of limitations, rejecting among other things contractor's indemnity arguments. Below is a summary of the decision prepared by Vandeventer Black Construction Team attorney Gretchen Ostroff.

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

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

FLSA Salary Increase Halted

Below is a Legal Alert on a signficant FLSA issue from the Vandeventer Black Labor Law Team

FLSA Salary Increase Halted

A federal court has enjoined the Fair Labor Standards Act (FLSA) salary increase. The court’s order, entered on November 22, 2016, is a nationwide preliminary injunction. As a result, employers do not have to comply with the new FLSA salary threshold on December 1, 2016.  

The U.S. Department of Labor (DOL) issued a final rule on May 17, 2016, increasing the FLSA’s salary threshold. The final rule, which was to go into effect on December 1, 2016, would have increased the salary threshold for the FLSA white collar exemptions from $23,660 per year to $47,476 per year, and the annual compensation threshold for the “highly compensated” exemption from $100,000 per year to $134,004 per year. Had the new rule gone into effect, any employee paid less than $47,476 per year would have been eligible for overtime pay. The DOL’s final rule also provided for automatic adjustments to the salary and highly compensated threshold every three years. Employers who have been grappling with whether to give raises to employees paid less than $47,476, or budget for increased overtime costs, or hire additional personnel to reduce overtime hours, may now lay their concerns aside. The FLSA is not changing on December 1, 2016, after all.

Twenty-one states and over fifty business organizations filed suit to stop the DOL’s final rule. Their suits were consolidated in the United States District ­­Court for the Eastern District of Texas. In its preliminary injunction, that Court ruled that the DOL exceeded its authority by raising the salary threshold level so high that it supplanted the “duties tests” for the FLSA white collar exemptions. The court stated that the DOL “create[d] essentially a de facto salary-only test,” thus subverting the importance of the FLSA exemptions’ duties tests. The Court also found that the DOL did not have authority to create an automatic adjustment to the salary threshold.

The injunction is preliminary, but it signals that the Court is likely to issue a permanent injunction later. The Court’s decision is the second recent defeat for President Obama’s agenda: just last month, the same federal Court in Texas issued a preliminary injunction blocking the federal contractor “blacklisting” regulations. See Vandeventer Black’s Legal Alert on that topic here.

For assistance reviewing your business' FLSA compliance, or other labor or employment matters, please contact us to set up a meeting with our labor and employment law team.

Anne G. Bibeau
Dean T. Buckius
Arlene F. Klinedinst