Global Connection Snell & Wilmer L.L.P.
December 2011

James J. Sienicki
James J. Sienicki

602.382.6351
jsienicki@swlaw.com
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Timothy J. Toohey
Timothy J. Toohey
213.929.2637
ttoohey@swlaw.com
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Scott C. Sandberg
Scott C. Sandberg
303.634.2010
ssandberg@swlaw.com
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Shawn M. Rodda
Shawn M. Rodda
303.634.2036
srodda@swlaw.com
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Michael J. Yates
Michael J. Yates
602.382.6246
myates@swlaw.com
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Gerard Morales
Gerard Morales
602.382.6362
jmorales@swlaw.com
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Marc A. Erpenbeck
Marc A. Erpenbeck
602.382.6512
merpenbeck@swlaw.com
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Christopher P. Colyer
Christopher P. Colyer
602.382.6579
ccolyer@swlaw.com
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Jason Ebe
Jason Ebe
602.382.6240
jebe@swlaw.com
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A Letter from the Editor

In our final issue of 2011, we begin with an article by Timothy Toohey, who examines the impact a recent U.S. Supreme Court decision regarding bilateral arbitration may have on subsequent California construction defect disputes that have mandatory arbitration as their dispute resolution mechanism. Tim also discusses whether a party to a construction defect case should press for arbitration or opt to litigate.

Scott Sandberg then addresses the latest from Colorado regarding poor workmanship in construction and whether general liability coverage is available in “What Constitutes Construction Defects Under Colorado’s Commercial General Liability Policy Exclusions.” The Tenth Circuit's recent decision on this subject is cited and explained in this article.
 
Next is some bright news: “California, Colorado and Arizona Lead the Nation in Total Solar Jobs As Renewable Energy Sector Soars,” author Shawn Rodda provides the illuminating details about new solar plants and wind energy farms for Southwest-based projects that will create hundreds of jobs.

The fourth article, by Michael Yates, “Anti-Indemnity Statutes and Contractual Additional Insured Requirements,” furnishes information and a handy chart for those working on construction projects throughout the Southwest on anti-indemnification statutes and contractual additional insured provisions.

In “Ready-Mix Delivery Companies and Their Drivers Are Not Engaged In The Building and Construction Industry Under Labor Law,” labor attorney Gerard Morales identifies employees who are and those who are not primarily engaged in the construction industry and how that affects their collective bargaining relationship with labor unions.

Marc Erpenbeck and Chris Colyer then address and break down the EPA's new Lead Rule related to child-occupied facilities in their article, “EPA Finalizes and Revises Its Lead Renovation, Repair and Painting Program Rule.”

The final article reviews the pros and cons of Self-Certification Programs. In “Municipality Code Review Self-Certification Programs Can Add Exposure to Owners, Developers and Design Professionals,” Jason Ebe examines the time and cost benefits that might be realized with the City of Phoenix’s Self-Certification program as well as the risks associated from such a program.

If you have questions or comments about any of these articles, you may email the attorney(s) who authored the article, the editor or your regular Snell & Wilmer contact. If you have any suggestions for future articles, please feel free to email them to me.

We are also very happy to announce that Snell & Wilmer has been recognized as a national “Tier 1” firm in construction litigation in the 2011-2012 edition of “Best Law Firms” by U.S. News and Best Lawyers®.

Best Law Firms

Happy Holidays!
Jim Sienicki

 

Arbitration in California Construction Defect Cases After AT&T Mobility v. Concepcion

The U.S. Supreme Court's recent decision in AT&T Mobility LLC v. Concepcion, 563 U.S. ___, 131 S.Ct. 1740 (2011) (Concepcion) has engendered considerable controversy for upholding arbitration provisions in consumer contracts containing class action waivers. Importantly for the construction industry, the decision may impact other types of cases in which California courts have found arbitration provisions unenforceable, including construction defect cases brought by homeowners or condominium associations against developers.  

In Concepcion, the Court invalidated the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, 162 (2005), which held that class action waivers in certain consumer contracts are unenforceable on unconscionability grounds. The Concepcion Court held that rejecting arbitration because of a class action waiver violated Section 2 of the Federal Arbitration Act (FAA), which specifies that agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Concepcion Court also found that the Discover Bank rule was preempted because it was an obstacle to the accomplishment of the FAA's objectives—encouraging efficient and quick dispute resolution through arbitration—because it was “applied in a fashion that disfavors arbitration” by California courts.

Although the Concepcion decision has attracted commentary, much less attention has been paid to the impact of Concepcion on California cases holding that arbitration provisions are unenforceable because they are part of a contract of adhesion. Justice Scalia's majority opinion in Concepcion clearly expressed the Court's displeasure for what it viewed as the propensity of California courts to refuse to enforce arbitration provisions in private contracts. Noting that “California's courts [are] more likely to hold contracts to arbitrate unconscionable than other contracts,” the Court likened such tendency to the “judicial hostility towards arbitration that prompted the FAA.” Nor did the Court look any more favorably on California courts' justification for rejecting arbitration agreements, i.e., that they were part of a contract of adhesion. Indeed, the Court made short shrift of this argument by stating that “the times in which consumer contracts were anything other than adhesive are long past.”

The broader criticism levied by the Court in Concepcion against invalidating arbitration provisions on grounds of unconscionability logically extends to recent cases in which the Court of Appeals has invalidated arbitration provisions in construction defect disputes on those grounds. One of the more significant decisions in this area is Baker v. Osborne Development Corp., 159 Cal. App. 4th 884 (2008), in which the court held that an arbitration provision in a new home warranty program established by a builder was unenforceable as an unconscionable contract of adhesion. One factor considered by the Baker court was that the arbitration provision at issue was not included in a contract between the homebuyer and the builder, but was rather found in a document “that purported to be an application by the builder to obtain a warranty from [the warranty program administrator].” The court concluded that “there is no evidence the arbitration agreement was a negotiable term and it appeared to be a contract of adhesion” and that “[t]he arbitration agreement at issue in the present case was … one-sided.” See also Bruni et al. v. Didion et al., 160 Cal. App. 4th 1272, 1293 (2008) (arbitration provision in home warranty program was part of a contract of adhesion and therefore unenforceable).

In Thompson et al. v. Toll Dublin, L.L.C. et al., 165 Cal. App. 4th 1360, 1364 (2008), which also involved construction defect allegations, the Court of Appeals similarly invalidated arbitration provisions on unconscionability grounds. The court found that the arbitration provisions received by the homeowners in a “Title 7 Master and Dispute Resolution Declaration (Compliance with Civil Code)” and “Declaration of Covenants, Conditions and Restrictions” (CC&Rs) were unconscionable because they had been signed by the developer “more than two years before any plaintiff closed escrow on a home,” were “imposed on all buyers of the 264-home project,” and were part of “some 800 pages” of documents received and acknowledged by purchasers. Because of the “pervasiveness of the unconscionable provisions related to arbitration and the fact that the purported scope of the arbitration provisions exceeded plaintiff's reasonable expectations,” the court in Thompson held there were “no isolated provisions that can be severed and the arbitration provisions as a whole are unenforceable against plaintiffs.”

Although Concepcion indicates that the practice may be preempted by the FAA, California courts may continue to invalidate arbitration provisions in what it views as contracts of adhesion. Recent cases show that California courts may continue to do so either by taking a narrow view of the application of Concepcion or by applying procedural principles, such as standing or waiver.  

Sanchez v. Valencia Holding Col, LLC, 200 Cal. App. 4th 11, 2011 Cal. App. LEXIS 1327 (2011), is an example of the former approach. In Sanchez, the California Court of Appeals narrowed Concepcion by ignoring the broader implications of the Court's opinion. The court rejected an arbitration provision contained in an automobile purchase agreement not because it contained a class action waiver, but because the “the arbitration provision as a whole is unconscionable.” The court concluded that the arbitration provision, which was located on the last page of an agreement “in small font with reduced line spacing,” was “procedurally unconscionable because it is adhesive and satisfies the elements of oppression and surprise; it is substantively unconscionable because it contains terms that are one-sided in favor of the car dealer to the detriment of the buyer.”

Promenade at Playa Vista Homeowners Assoc. v. Western Pacific Housing, Inc., 2011 Cal. App. LEXIS 1400 (November 8, 2011), demonstrates the latter approach, i.e., invalidating arbitration agreements on procedural, rather than unconscionability grounds. In Promenade at Playa Vista, the Court of Appeals held that a developer could not compel binding arbitration pursuant to an arbitration provision in the CC&Rs because they were equitable servitudes, not a contract to arbitrate. The court found that the developers had no standing to enforce CC&Rs once they had completed the project and sold the units because they lacked the ownership interest necessary to enforce an equitable servitude. The court thus avoided not only Concepcion, but also whether the CC&Rs were unconscionable—an issue which is currently before the California Supreme Court in Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 187 Cal. App. 4th 24 (2010) (opinion superseded by grant of review). See also Roberts v. El Cajon Motors, Inc., 2011 Cal. App. LEXIS 1399 (November 8, 2011) (no need to determine issue whether waiver of class wide relief was preempted by Concepcion because defendant had waived arbitration by waiting five months to invoke arbitration).

Arbitration Versus Litigation
Given that California courts may continue to find arbitration provisions unenforceable, should a party to a construction defect case press for arbitration or be content with litigation? The answer depends upon consideration of both the advantages and disadvantages of arbitration.

Although its virtues are frequently lauded, arbitration has several disadvantages as compared to litigation. For example, arbitrators are bound by the agreement to arbitrate according to the rules of a particular organization (e.g., the American Arbitration Association), not by the rules of procedure, evidence or case law. Discovery, including depositions, which may be strategically useful in some disputes, is severely curtailed or eliminated altogether in arbitration. Parties may thus find themselves at an arbitration hearing without a clear idea of the testimony to be given by witnesses for the opposing party and without the safeguards afforded by the rules of evidence.

A party unhappy with the outcome of an arbitration also faces an uphill battle in challenging the results in a trial court with no appeal to a higher court, even if party believes the arbitrator committed errors of law. Harmonizing conflicting or inconsistent arbitration provisions in multiple contracts presents challenges in an arbitration that may be more acute than in litigation, where courts are accustomed to addressing disputes with multiple parties and conflicting contractual provisions.

In cases involving multiple parties, arbitration may not be that much less expensive than proceeding in state court, particularly when filing fees, fees for arbitrator services, expert fees and ancillary costs are taken into account. Although arbitration is usually considerably faster than litigation, particularly in these days of budget shortfalls, speedier resolution may not always be an advantage or may come with too high a price, given the sacrifice of the procedural and substantive safeguards afforded by litigation.

In short, parties to construction disputes, like those to any other type of dispute, should carefully assess the pros and cons of both arbitration and litigation before deciding on a course of action and discuss this decision beforehand with knowledgeable counsel.

 

Tenth Circuit Weighs In On Continuing Saga Of What Construction Defects Are An Occurrence Under Colorado CGL Policies

As previously reported in Under Construction, in 2009 the Colorado Court of Appeals held in General Security v. Mountain States Mutual that “a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence.”  This holding was controversial in the construction industry because it went beyond traditional commercial general liability policy exclusions of a contractor’s faulty workmanship to bar coverage for all property damage caused by a contractor’s faulty workmanship.  Colorado’s General Assembly responded to General Security in 2010 by enacting C.R.S. § 13-20-808, which requires courts to interpret all insurance policies “currently in existence … broadly in favor of coverage.”  Whether C.R.S. § 13-20-808 applied retroactively was left unanswered. 

On November 1, 2011, the United States Court of Appeals for the Tenth Circuit held in Greystone Const., Inc. v. National Fire & Marine Ins. Co. that the statute operated only prospectively.  However, the Court went further and rejected the Colorado Court of Appeals’ holding in General Security, predicting that the Colorado Supreme Court would hold that “injuries flowing from improper or faulty workmanship constitute an occurrence so long as the resulting damage is to nondefective property, and is caused without expectation or foresight.”  While C.R.S. § 13-20-808 undeniably imposes this requirement on all policies issued after the effective date of the statute in 2010, the Colorado Supreme Court has not yet addressed the conflict between the General Security and Greystone courts concerning pre-effective date policies. 

 

California, Colorado and Arizona Lead the Nation in Total Solar Jobs Nationally as Renewable Energy Sector Soars

While the construction industry has suffered tremendously over the last few years, one bright spot has been renewable energy. The Solar Foundation recently released its Solar Jobs Census for 2011, reporting that U.S. solar jobs increased at nearly 10 times the job growth rate of the rest of the economy. Further, solar employers expect to increase the number of solar jobs by 24 percent from August 2011 to August 2012. 

Colorado has been a leader in the solar industry, coming in second to California in total solar jobs (and leading the country in total solar jobs per capita). Abound Solar, a Colorado-based company that employs about 350 people, recently announced it will use a $400 million loan from the Department of Energy to help pay for the construction of a thin-film solar module manufacturing plant in Indiana. In addition, General Electric, Inc. has announced that it will construct what will be the largest solar factory in the United States in Colorado. The facility will manufacture solar panels and will eventually employ 400 workers.

The solar industry is also going strong in Arizona, which ranks third nationally in total solar jobs.  Arizona-based First Solar, Inc. has finalized plans for its Mesa plant, which will create 600 permanent jobs and 400 to 500 construction jobs. The facility will produce solar panels with a total output of more than 250 megawatts. Sempra Energy has announced plans to construct a 150-megawatt project called “Mesquite Solar 1” about 45 miles west of Phoenix. Boosted by a $337 million loan from the Department of Energy, the electricity it generates will be sold to Pacific Gas & Electric Company and will be enough to generate power for nearly 31,000 homes. 

In addition to the projects outlined above, new solar plants have been announced in states such as Mississippi, Ohio and New Jersey. Many of these projects (though not all of them) have been subsidized by the stimulus loan guaranty program administered by the Treasury Department, pursuant to which renewable energy project owners could receive cash grants for up to 30 percent of the cost of a project in lieu of a tax credit. Though the program expired on September 30, 2011, the Solar Energy Industries Association and other industry trade groups are pushing Congress to extend it into 2012. 

Wind energy projects have similarly skyrocketed in recent years. In 2004 only 30 wind farms existed in the United States; by 2010 there were almost 400, resulting in approximately 75,000 jobs. According to a recent report by the American Wind Energy Association, Colorado led the country in the amount of new wind energy installed during the third quarter of 2011. Xcel Energy, Inc. has proposed a 200-megawatt wind farm in Limon, Colorado, which is projected to save its customers almost $278 million in electricity bills over the next 25 years.

In addition, eight new wind projects have been planned for northwestern Ohio and southeastern Michigan, adding up to $2.8 billion in investment and generating enough electricity to power approximately 400,000 homes. In Alaska, the Fire Island Wind Project has been approved, which will consist of an 11-turbine farm capable of powering 6,000 homes. Site preparation for the project has commenced, infrastructure construction is planned to commence in the fall of 2011 and project commissioning and commercial power is anticipated in late 2012.

Other evidence of the surge in renewable energy construction projects is the American Institute of Architect’s (AIA) announcement that it will release “green” model contract forms designed for use on renewable energy construction projects. The AIA previewed the forms at the U.S. Green Building Council’s Greenbuild International Conference and Expo held in Toronto  October 4-7. The forms are designed to limit architects’ legal exposure on these types of projects.  The contract forms will be available in the first quarter of 2012.

California, Colorado and Arizona are ranked first, second and third in renewable energy growth.

 

Anti-Indemnity Statutes and Contractual Additional Insured Requirements

Contractual agreements between owners and general contractors and/or between general contractors and subcontractors routinely include “indemnity” and/or “additional insured” provisions. Indemnity provisions typically require one party (typically the subcontractor or general contractor, or the “indemnitor”) to indemnify the other (typically the general contractor and/or owner, or the “indemnitee”) for any losses or claims arising out of the indemnitor’s actions. “Additional insured” provisions typically require one party to purchase insurance naming a contractor, owner or others as an insured party on the Commercial General Liability policy. These provisions are typically disfavored by subcontractors because these provisions shift financial responsibility to the subcontractor even when the subcontractor may not be at fault for the loss. Moreover, subcontractors have argued that indemnitees may not have the incentive to exercise care to avoid losses because the indemnified party is not responsible for its own actions.

Based upon these concerns, along with the idea that subcontractors may not have equal bargaining power in their negotiations with general contractors, most state legislatures have enacted statutes limiting the scope of legal liability that one party may contractually transfer to another. These statutes, also known as “anti-indemnity statutes,” work differently depending on the specific language in each state statute. For example, most state statutes forbid indemnification when the negligence alleged arises from the indemnitee’s sole negligence. On the other hand, many anti-indemnification statutes allow indemnitees to contractually assign their liability to indemnitors if the indemnitees are only partially responsible for the loss. This subtle but substantial difference in statutory language can result in significant difference regarding who pays the loss under contractual indemnification clauses.

On the other hand, “additional insured” provisions typically do not violate state anti-indemnity statutes. As a result, many commentators believe that well-drafted “additional insured” provisions essentially circumvent state anti-indemnity statutes. In response, a handful of states have passed amended or additional statutes to close this additional insured “loophole.” For example, Colorado prohibits “any provision in a construction agreement that requires a person to indemnify, insure, or defend in litigation another person against liability for damage arising out of death or bodily injury to persons or damage to property caused by the negligence or fault of the indemnitee or any third party under the control or supervision of the indemnitee” as void against public policy and unenforceable. See Colo. Rev. State. § 13-21-111.5 (emphasis added). While Colorado is one of the few states that has closed the “additional insured loophole” as of the date of this publication, the law on this important topic is in a constant state of flux. Thus, it is important to understand if and how anti-indemnification statutes work in your particular state or states. A chart identifying the status of anti-indemnification statutes and additional insured provisions in states in which our law firm maintains an office is set forth below.

State

Bars Indemnity for sole negligence of indemnitee

Bars Indemnity for both sole and partial negligence of indemnitee

Closes Additional Insured Loophole

Comments

Arizona

Yes (for private work).

Yes (for public work only).

No.

A.R.S. §§ 32-1159, 34-226, 41-2586. Exception for entry onto adjacent land.

California

Yes.

Yes, for residential construction defect claims with respect to subcontractor obligations.  

No.

Cal. Civ. Code §§ 2782. Exception for entry onto adjacent land.

Colorado

Yes.

Yes.

Yes.  

Col. Rev. Stat. §§ 13-50.5-102, 13-21-111.5.

Nevada

Not addressed by statute.

Not addressed by statute.

No.

Contractual indemnity provisions have been strictly construed in recent court cases

Utah

Yes.

Yes.

No.

Utah Code
§ 13-8-1 exception permits indemnity of owner.

 

Ready-Mix Delivery Companies and Their Drivers Are Not Engaged In The Building and Construction Industry Under Labor Law

Under the National Labor Relations Act (NLRA or labor law), employers engaged in the building and construction industry are privileged to enter into a limited type of collective bargaining relationship with labor unions, whereby either party is free to repudiate the relationship upon the expiration of the contract. The employer and the union may also decline to negotiate or adopt a successor agreement once their contract expires. Construction employers and labor unions may enter into this limited collective bargaining relationship, commonly referred to as an 8(f) relationship (in reference to the section of the NLRA) even before employees have been hired.
 
A Section 8(f) relationship is less burdensome on the employer than a regular collective bargaining relationship (also referred to a Section 9(a) relationship, in reference to the section of the NLRA), which can lawfully be entered into only upon some showing that a majority of the employees want to be represented by the union. Under a regular collective bargaining relationship the employer is obligated to refrain from making unilateral changes in terms and conditions of employment, even after the expiration of the contract, absent an overall impasse in bargaining. (Similarly, the presumption of union majority status continues after the contract expires.) In contrast with a section 8(f) contract, a section 9(a) contract, in effect, survives its expiration.
 
Section 8(f) was included in the NLRA in order to permit employers and labor organizations in the building and construction industry to maintain stability in their relationship, by permitting the signing of contracts even before employees were hired. This provision was an attempt to accommodate the fact that the “construction industry is peculiarly marked by sporadic employment at locations that are continually changing.” Construction employers and unions can therefore enter into contractual bargaining relationships at a time when the union cannot show that it has majority status among the employees.
 
In order to lawfully enter into an 8(f) bargaining relationship, the following requirements must be met: 1) the employer must be engaged primarily in the building and construction industry; 2) the agreement must be with a union of which building and construction employees are members and; 3) the agreement must cover employees who are engaged in the building and construction industry. Hudson River Aggregates Inc., 246 NLRB 192 (1979), enf. 639 F. 2d 865 (2d Cir. 1981)
 
An employer who seeks to show that its collective bargaining relationship is an 8(f) relationship bears the burden of showing that it is an employer “engaged primarily in the building and construction industry.” Engineered Steel, 352 NLRB 589 (2008). In this regard, the National Labor Relations Board (NLRB or Labor Board) has long held that the “building and construction concept subsumes the provision of labor, whereby materials and constituent parts may be combined on the building site to form, make or build a structure.” Indio Paint, 156 NLRB 951 (1966).
 
Many ready-mix and other suppliers to construction companies continue to believe that they are employers engaged primarily in the building and construction industry and therefore are privileged to enter into 8(f) collective bargaining relationships. The NLRB has consistently rejected those contentions and held that union contracts with those employers are 9(a) contracts, based upon regular collective bargaining relationships.
 
Most recently, a ready-mix company sought to repudiate its collective bargaining relationship and make changes in terms and conditions of employment upon the expiration of its union contract covering its drivers and helpers. The union filed unfair labor practice charges against the ready-mix company. The NLRB held that such repudiation and unilateral changes constituted unfair labor practices, because the ready-mix company was a supplier to customers engaged in the building and construction industry and not an employer in that industry itself. The ready-mix company was like a hardware store that provided supplies to customers in the building and construction industry. The NLRB emphasized in its decision that the ready-mix drivers and helpers covered by the union contract spent most of their time driving to and from the customer job sites and while at the job sites generally remained in their trucks, except to hose off their equipment. Irving Ready Mix Inc., 357 NLRB No. 105 (10/31/2011).
 
Like all employers, suppliers to construction contractors should consider consulting with labor counsel before entering into collective bargaining relationships, in order to determine with certainty the scope of the relationship. They should not assume that their collective bargaining relationships would be of the same scope as that of their customers, simply because the same labor unions are involved.

 

EPA Finalizes and Revises Its Lead Renovation, Repair and Painting Program Rule

The Environmental Protection Agency’s (EPA) Lead Renovation, Repair and Painting Rule (RRP Rule), effective October 4, 2011, may impact contractors of residential housing, schools and some commercial buildings.

The RRP Rule establishes requirements for the renovation of homes and buildings that may contain lead-based paint. Its purpose is to both inform residents of housing and “child-occupied facilities” of lead-based paint hazards and to ensure that the individual(s) renovating these properties have the proper training, certification and work practices to minimize these hazards.

The RRP Rule does not apply to buildings built in or after 1978. Instead, the RRP Rule only applies to pre-1978 construction in residences and so-called “child-occupied facilities.” The rationale underlying this limited applicability is that the use of lead paint was eliminated in 1978 and that children are the most susceptible to lead’s adverse effects. EPA defines a “child-occupied facility” as a building (or portion of a building) constructed prior to 1978 that is visited by a child less than six years of age, at least twice a week, for an average of three hours per visit, for at least 60 hours per year. Given these parameters, many buildings are excluded from the RRP Rule. However, individual(s) and contractors engaging in home remodels, as well as landlords, schools, hospitals and child care providers should be alert to its applicability.

The final RRP Rule institutes a variety of changes from the interim rule, including:

  • Revisions to containment requirements for exterior renovations;
  • Changes to cleaning verification requirements;
  • Amendments to paint chip collection and testing requirements;
  • Revisions to requirements imposed upon states and Indian tribes that have received permission to administer and enforce the RRP Rule in lieu of EPA; and
  • Clarification of High Efficiency Particulate Air (HEPA) vacuum requirements and on-the-job training requirements.

The final RRP Rule is not as drastic as originally proposed. Initially, EPA proposed to require a renovator to conduct dust-wipe testing as part of the renovation process. However, after feedback from stakeholders, EPA chose to eliminate this proposed requirement given the undue burden it would place on the renovating parties.

Owners, contractors and building professionals should note that other federal, state and local laws and regulations may also apply. For example, Colorado has implemented its own lead-paint rules that establish certification and abatement requirements.

Prior to any renovation, owners, contractors and building professionals should determine whether the RRP Rule is applicable to their particular project. If applicable, these parties should ensure that the appropriate controls and processes are in place to comply with the final RRP Rule. A knowledgeable construction attorney can assist owners, contractors and building professionals if they have questions or need guidance on compliance with the final RRP Rule.

 

Municipality Code Review Self-Certification Programs Can Add Exposure to Owners, Developers and Design Professionals

Owners, developers and design professionals who historically have sought to avoid the sometimes long and painful process of municipal code review will likely welcome opportunities to self-certify code compliance to bypass the time and effort of the review process. The benefit of cutting down the time for this municipal review process can often make the difference between success (profit) or failure (loss) of a project, particularly in this tight economy. However, the flip side of this benefit is that the owners, developers and design professionals participating in the self-certification program, and particularly the entities and even individuals making the certifications, can expose themselves to potentially significant liability.

Take as an example the City of Phoenix Planning and Development Department’s Self-Certification Program Rules and Regulations. Phoenix’s self-certification program eliminates building plan reviews by allowing a registered architect or engineer to take responsibility for code compliance and to certify that the project complies with the Phoenix Building Construction Code. Depending on the scope of the project, permits can be issued within one to five calendar days. Eligible projects include single family residential, multiple family residential, town homes, mixed use, mercantile, business or storage and site/civil engineering.

The self-certification submission consists of a signed, personal verification that (a) is made by a self-certified professional identified in a building permit application, (b) accompanies plans filed with the city by the professional, (c) attests that the plans do not contain any false information, (d) attests that the plans are in compliance with the requirements of the code and (e) attests that the plans were prepared by, prepared under the direct supervision of, or were reviewed and stamped by the professional identified in the permit application.

To this point, owners, developers and design professionals may see no issue with the requirements for self-certification, as they likely all intend that the plans submitted for permit are in compliance with code and do not contain any false information. However, the certification requirements further include a defense, indemnity and hold harmless provision. Specifically, for each project, the self-certified professional is required to submit a letter signed by the owner responsible for the work in which the owner agrees to protect, defend, indemnify and hold harmless Phoenix and its officers, representatives, managers and employees against any and all claims, liabilities, judgments, costs, expenses, delays, demands or injuries arising out of or in any way connected with the design, construction, code compliance review or issuance of a building permit for the project identified in the building permit application. Further, the owner must agree that if construction is contrary to the code or any other applicable law or to any permit issued under the self-certification program, the owner shall, without undue delay, remove or modify, at such owner’s own expense, any component of such construction that does not conform to the requirements of the code or any other applicable law or to such permit.

This defense, indemnity and hold harmless obligation does not exist in the absence of the self-certification program. In many prior articles of this newsletter and with respect to defense and indemnity obligations in design and construction agreements generally, we recommend that significant attention and extreme care be given to the obligations imposed on any party with respect to defense and indemnify obligations for claims brought against others. This example is no exception. Owners, developers and design professionals alike know that plans are rarely if ever perfect. It is not uncommon for the code review process to reveal code violations that can be corrected before the design is permitted for construction. Although the code review process should not be relied upon in lieu of an internal quality review and assurance process, the avoidance of this code review process could have the effect of allowing hidden code violations in the design pass through to construction, resulting in claims and liability. Any owner or developer providing this defend, indemnify and hold harmless letter, and any self-certified professional submitting the application, should be concerned about the potential exposure that might exist as a result of any code violations or any false information contained within the plans submitted for permit. In addition, although the regulations expressly require the self-certified professional to maintain certain minimum limits of professional liability insurance ($500,000 per claim, $1,000,000 annual aggregate), there is no assurance that this insurance will cover claims made by Phoenix against owner signing the defend, indemnify and hold harmless letter, or other claims against the self-certified professional who submitted the plans for permit. You should discuss this issue thoroughly with your insurance broker.

With respect to Phoenix’s program, nothing in its rules and regulations prevents a self-certified professional from submitting a project through the standard plan review process. Therefore, it is recommended that for each project, the involved owner, developer and design professional, including the self-certified professional, perform a risk analysis of the project, consider the potential for hidden code violations and resulting defense indemnity and hold harmless exposure, the insurability of the exposure, and other relevant business factors in deciding whether the time saved in the code review process warrants the additional risk assumed through the certification and defense, indemnity, and hold harmless provisions. The same recommendation applies to any similar self-certification program in your jurisdiction.

 

Snell & Wilmer Recognized as a National “Tier 1” Firm in Construction Litigation

Snell & Wilmer is pleased to announce that it has been recognized as a national “Tier 1” firm in construction litigation in the 2011-2012 edition of “Best Law Firms” by U.S. News and Best Lawyers®.

Selection to “Best Law Firms” is based on a peer-review survey comprising nearly 4 million confidential evaluations by attorneys throughout the country.

 

 

 

 

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©2011 All rights reserved. The purpose of this newsletter is to provide our readers with information on current topics of general interest and nothing herein shall be construed to create, offer or memorialize the existence of an attorney-client relationship. The articles should not be considered legal advice or opinion, because their content may not apply to the specific facts of a particular matter. Please contact a Snell & Wilmer attorney with any questions.
Snell & Wilmer L.L.P.