Published on March 1st, 2013 | by UC&D Magazine0
2012 Construction Case Law Update
The Utah appellate courts routinely rule on cases involving construction projects, and 2012 brought two significant cases that will affect how construction projects are administered. The first case dealt with liquidated damages provisions, which are common in construction contracts. For many years, contract drafters have struggled with making liquidated damages provisions enforceable while giving the intended protection against project delays. Complicating this effort were courts giving various tests for those provisions, including whether the liquidated damages were actually an unenforceable penalty rather than an attempt to estimate actual damages.
The Utah Supreme Court gave clarity to liquidated damages provisions in Commercial Real Estate Investment, LC v. Comcast of Utah II, Inc. In that case, the Utah Supreme Court held that liquidated damages provisions will not be subject to heightened scrutiny. Rather, these provisions will be subject to the same equitable considerations as other contract provisions, including whether the provision is unconscionable.
Although this case did not involve a construction project, the result is nevertheless instructive. Liquidated damages provisions are now more likely to be upheld, for better or for worse, unless they are drafted to be excessively unfair to one party. Consequently, contractors and subcontractors agreeing to liquidated damages provisions should give them attention and scrutiny to ensure that they are fully aware of the consequences of a project delay for which they are responsible.
The second significant case from the Utah appellate courts examined the necessary wording for lien waivers. The Utah Court of Appeals held in Lane Myers Construction, LLC v. Countrywide Home Loans, Inc. that a contractor’s certification that there were no liens or claims that might result in a lien was not equivalent to the form of written waiver and release of lien required by the Utah mechanics’ lien act.
In the case, the contractor was not paid in full for its work in building a home. It recorded a mechanics’ lien and sued to foreclose. The homeowners’ lender argued that the draw requests the contractor submitted to draw funds from the construction loan had effectively waived any mechanics’ lien rights for construction work completed prior to the date of each request. Each draw request contained identical language:
“The Borrower(s) and General Contractor state that . . . available proceeds of the loan are sufficient to finally and fully complete and pay for completion of improvements, and that no suppliers, subcontractors, laborers, or other persons are claiming or are entitled to claim a lien against the property securing the loan.”
During construction, the contractor had executed at least eleven of these draw requests. In addition, the contractor executed a final draw request that provided: “The General Contractor has to date been paid in full for all work performed,” “no liens or claims that may result in liens exist against the above-described property,” and “upon said disbursement by Lender the General Contractor will be paid in full under the Construction Contract.”
Based on the language of the draw requests, the lender argued that the requests created a lien release pursuant to former Utah Code section 38-1-39 (now 38-1a-802) and barred any claim for foreclosure of the lien. The trial court agreed and granted summary judgment for the lender. In reversing the trial court and finding for the contractor, the Utah Court of Appeals noted that, while the draw requests contained much of the information required under Utah Code section 38-1-39, the statue must be liberally construed in favor of lien claimants and the draw requests were not “in substantially the form provided” in the statute. The Court of Appeals concluded that, at a minimum, a valid lien waiver and release form must contain each of the statute’s components to be “in substantially the form provided” and therefore comply with the requirements of section 38-1-39. The lender’s draw requests did not explicitly state that they were intended to be waivers and releases of mechanics’ liens.
The takeaway from this case is that those relying on lien waivers and releases should either use the forms provided by the Utah Legislature or ensure that their “custom” forms contain the required components of Utah Code section 38-1-39. As always, consultation with an attorney familiar with lien waivers is recommended.
Adam T. Mow, AIA, Esq. is a construction law attorney at Jones Waldo Holbrook & McDonough, PC in Salt Lake City. He is also a licensed architect and represents members of the construction industry with regard to contract drafting and negotiation, litigation, bonds, and mechanics’ liens. He is currently serving as the 2013 AIA president and can be reached at email@example.com or 801-534-7261.