Substantial Completion Blues

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SUBSTANTIAL COMPLETION BLUES

Every owner and general contractor is generally familiar with the concept

of Substantial Completion. From a scheduling standpoint, it is the

focal point of everyones attention from the very beginning of a project

until well, when the project is substantially completed. Despite this

intense focus, disputes about whether substantial completion is actually

achieved on a given date abound across the construction landscape.

These disputes often turn into litigation for no reason other than the par-

ties were not very clear on what they meant by substantial completion

when they signed the construction contract.

From the standpoint of courts and judges, substantial completion is

important in deciding whether a party has breached a construction con-

tract, and when relevant statutes of limitation begin to run with respect

to defective work. Most courts use the same denition utilized in most

construction contracts, namely that substantial completion occurs when

the owner is able to use the project for the purpose intended, or some-

thing similar to that. Most construction contracts, including the AIA

forms, have that kind of generic description of substantial completion.

Of course, there are many other contract provisions that are tied to

substantial completion, including liquidated damages, delay damages,

payment of retainage and similar matters.

However, despite the signicance of substantial completion to owners,

contractors and subcontractors alike, it is quite apparent to construc-

tion litigators that very little attention is paid to the actual denition of

substantial completion used in a construction contract, or the unique

circumstances of a particular project. This is surprising, given that all

construction projects are clearly not alike. In many cases, the generic

denition referenced above simply does not get the job done for any of

the parties involved. It rarely works for the owner.

Properly dening substantial completion is critical from the standpoint

of meeting expectations and avoiding disputes. The concept of ben-

ecial occupancy, the standard contract formulation, can be subject to

many different interpretations. A contractor might say that a certicate

of occupancy (whether temporary or permanent is a debate all by itself)

is dispositive as to the determination of a substantial completion date.

An owner might construe the situation more strictly, and say that the

CONSTRUCTION LAWREVIEW

November 2004

www.alston.com

Inside:

Announcement 3

Case and Legislative 3

Updates By State

Florida 3

Georgia 3

Mississippi 4

New York 4

South Carolina 4

Virginia 5

Federal Case Update 5

Mark Your Calendar 5

In the News 6

Construction Tips: 6

Lien Waivers: What Do

They Really Mean?
http://www.alston.com/http://www.alston.com/


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owner should be allowed to occupy and enjoy the building without any further disruptions (with punch

list items conned to the exterior of the building, for example).

The benecial occupancy denition certainly makes perfect sense if one is talking about a brand new,

vanilla ofce building in the suburbs with one tenant. However, it makes absolutely no sense when

talking about a hotel or residential project. On a residential or hotel project, the idea of punch list work

being performed in an occupied hotel room or an occupied apartment is unthinkable to the developer

and the resident. If the owner cannot turn the hotel room or apartment over to the resident to be enjoyed

without plumbers doing punch lists, then the project cannot generate revenue for the owner. Being able

to occupy the project, or receiving a certicate of occupancy, has no particular relevance to this owner

or developer.

Other projects pose similar problems. If the issue is the construction of retail shell space, how much

work has to be completed by the landlords contractor in order for the tenant to accept the premises for

xturing? If the issue is interior retail tenant space, how much work has to be completed by the contractor

for the retailer to open for business? What does the lease say about the work that has to be completed,

and when? In these circumstances, that may be the most important question. All of these questions

mustbe answered if the denition of substantial completion in the construction contract is going to be

accurate and useful in preventing a dispute at the end of the project.

For some of our clients that develop or construct many different types of projects, we often suggest that

they leave the substantial completion denition blank in their form contracts. The hope is that the project

manager will look at this issue along with all of the other business terms, and come up with a denition

that makes sense for the particular project involved.

This denition may need to be very detailed and contain a laundry list of items bearing on the issue of

substantial completion. This could include specic site work items (site lighting, paving, etc.) that have

nothing to do with the building itself, but which bear on the issue of substantial completion, at least a

substantial completion that meets the expectations of the developer. In the apartment example, one

should determine what common area work has to be completed in order to achieve substantial comple-

tion, above and beyond completion of the residential units.

As noted above, the difculty of determining when substantial completion has been achieved can have

enormous consequences. Delay damages, payments and retainage releases are almost always tied to

substantial completion. As a result, a lot of money is riding on whether substantial completion has been

achieved on a particular project, and by what date. It is therefore critical that the parties to the contract

avoid, if at all possible, arguing about the denition of substantial completion and what has to be done

to achieve that status on the project.

Deborah Cazan


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CASE UPDATES BY STATE

Florida

Subcontractors Failure to Separately Register and License Its Fictitious Name Did Not Invalidate

Its Subcontract

In Martin Daytona Corp. v. Strickland Const. Services, Floridas Fifth District Court of Appeals ruled tha

a subcontractors failure to separately register and license the ctitious name under which it entered

into a subcontract did not invalidate the subcontract. In this case, the subcontractor sued to collec

amounts allegedly owed by the general contractor at the end of a project. The subcontract contained

an arbitration clause and the contractor moved to stay or abate arbitration arguing that the clause was

unenforceable because the subcontractor entered the subcontract under a ctitious name, without sepa-

rately registering and licensing the name, in violation of Floridas contractor licensing laws. The Fifth

District ruled that the subcontract is enforceable, notwithstanding the subcontractors failure to registe

and obtain a separate license. The court determined that a recent amendment to the contractor licens

ing requirements claried that a contract is not invalid for the contractors failure to register or obtain a

license under its ctitious name. 881 So. 2d 686 (Fla. App. 5th

DCA Aug. 27, 2004)

Georgia

Georgia Legislature Enacts General Contractor Licensing Statute

The Georgia Legislature recently enacted a contractor licensing scheme designed to cover both resi

dential contractors and general contractors. O.C.G.A. 43-41-1 et. seq. The law will go into effec

when appropriations are budgeted for the licensing board, which did not occur during the 2004 legislative

session. The denition of contracting is very broad and includes not only performing the construction

or the management of the construction of improvements to real property for an owner, but also merely

offering to undertake such services for, or submitting a bid to, an owner. The denition also includescontracting work performed by a construction manager at risk. Generally, residential contractors mus

obtain a license if they contract directly with an owner for a value over $2,500 or receive a fee over

$2,500. However, no minimum dollar amount appears in the statue for general contractors. The statute

prescribes both criminal penalties and civil sanctions for failure to comply with the statue. Notably, like

most jurisdictions, an unlicensed contactor may not enforce its contract. An unlicensed contractor also

loses all lien and bond rights it may otherwise have had. Contractors who perform construction work in

the state of Georgia should play close attention to the new contractor licensing requirements and should

take steps to ensure they will be in compliance when the statute becomes effective.

ANNO

UNCMENT The Construction and Government Contacts Group is pleased to announce the relocation of one of

its attorneys, Brook A. Clark, to the rms New York ofce where she will join partner Daniel J. ONeill

as the second attorney from the Construction and Government Contracts Group in that ofce. For

many years, Alston & Bird has represented national and international clients who have engaged our

services to handle transactional and adversarial matters throughout the Northeast. The relocation of

Ms. Clark allows the Construction and Government Contacts Group to enhance its ability to providelocal support to clients who need business and adversarial advice on construction and government

contracts matters in New York City and throughout the Northeast.


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Mississippi

Mississippi Supreme Court Requires Contractor to Prove Objective and Subjective Impossibility

to Prevail on Defective Design Claim

In Evan Johnson & Sons Constr., Inc. v. State, the Mississippi Supreme Court held that the state and

its architect were not liable on the contractors defective design claim because the contractor failed to

prove the impossibility of constructing the building according to the design. The contractor believed that

it could not build the roof in accordance with the plans and specications. Despite the contractors objec-

tions, the state instructed the contractor to install the roof as designed. After the contractor attempted

to build the roof in a manner contrary to the plans and specications, the state rejected the contractors

work. The contractor sued the state and the architect alleging defective design. The court rejected the

contractors defective design claim because the contractor failed to prove both subjective and objective

impossibility. Because [the contractor] failed to prove any other contractor was unable to comply with

the original design and specications and because [the contractor] failed to attempt to construct the

roof according to the original design and specications, the contractors claim for defective design was

without merit. 877 So. 2d 360 (Miss. 2004)

New York

Failure to File Notice of Lending Costs Bank $1.9M

The New York Court of Appeals recently reminded banks of the importance of ling a Notice of Lending.

InAspro Mechanical Contracting Inc. v. Fleet Bank, N.A., 7, the court ordered Fleet to pay a group of

subcontractors $1.9 million dollars that it had applied to its mortgages on a residential housing project.

Fleet loaned Berry Street Corporation $12 million dollars secured by the assignment of Berrys rights in

a development contract with the New York City Housing Authority (NYCHA). Fleet applied NYCHAs

payments to its outstanding mortgages on the property. Several unpaid subcontractors (including

Aspro) sued Fleet, alleging that the Bank had diverted trust assets in violation of the states lien law.

The court found that Fleet was a trustee of the funds received from NYCHA, and had a duciary duty

to use those funds to pay for improvements to the property. Fleet breached that duty by using trust

funds to repay its own mortgages and was therefore liable for the subcontractors claims. Fleet could

have avoided liability entirely if it had led a Notice of Lending with the county clerk. By doing so, it

would have notied trust beneciaries that trust assets were being used to discharge Berrys debt. 805

N.E.2d 1037 (N.Y. 2004)

South Carolina

Right to Compel Arbitration Not Waived By Delay, Pre-Trial Activity and Litigation Costs

In Patten Grading & Paving, Inc. v. Skanska USA Building Inc., two attorneys from Alston & Birds

Construction and Government Contracts Group successfully argued an appeal before the U.S. Court of

Appeals for the Fourth Circuit. The appellate court reversed the lower courts ruling that the contractor had

waived its contractual right to compel arbitration when it waited eight months after commencing litigation

before moving to compel arbitration. In reversing, the court of appeals assessed several facts raised

by the subcontractor and relied upon by the district court, including the contractors alleged eight-month

delay in moving to compel arbitration, limited pre-trial activity and discovery, and the subcontractors

incursion of $5,800 in litigation costs, and concluded that taken in isolation and together, these facts did


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not constitute actual prejudice sufcient to demonstrate waiver of the right to compel arbitration. 380

F.3d 200 (4th Cir. 2004)

Virginia

Suretys Notice of Claim Against Principal, Coupled With Right and Opportunity to Defend, Suf

cient to Bind Surety To Judgment by Default Entered Against Principal

InAmerican Safety Casualty Ins. Co. v. C.G. Mitchell Construction, Inc., the Supreme Court of Virginia held

that a judgment by default entered against the principal on a payment bond as a discovery sanction was

binding and conclusive on the surety for purposes of summary judgment. Relying on the Eleventh Circui

Court of Appeals decision in Drill South, Inc. v. International Fid. Ins. Co., 234 F.3d 1232 (11th Cir. 2000)

the Virginia Supreme Court announced that a general rule has emerged whereby a surety is bound by

any judgment against its principal, default or otherwise, when the surety had full knowledge of the action

against the principal and an opportunity to defend. 601 S.E.2d 633 (Va. 2004)

FEDERAL CASE UPDATE

Expiration of One-Year Limitations Period on Appeal of Contracting Ofcers Decision Precludes

Claim Where Contractor Failed to Retrieve Decision from Post Ofce Box

In Riley & Ephriam Constr. Co. v. United States, the Court of Federal Claims dismissed the contractors

appeal of the contracting ofcers denial of its $300,000 claim. Under the Tucker Act, a contractor mus

le an appeal of a contracting ofcers nal decision in the Court of Federal Claims no later than one

year after the date of the contractors receipt of that nal decision. Here, the contractor received notice

in its post ofce box that a package sent by certied mail was received by the U.S. Post Ofce, but

failed to retrieve the package before it was returned to the sender after 29 days. The contracting ofce

also sent the decision via facsimile to the contractors attorney and received conrmation of receipt, bu

the attorney claimed never to have received the facsimile. The court found that the facsimile, combined

with evidence suggesting successful transmission, constituted receipt by the contractors agent. The

court also found that receipt by the Post Ofce was sufcient as well, so that the contractors suit in the

Court of Federal Claims, led over a year after both the post ofce box receipt and the facsimile, was

untimely. 61 Fed. Cl. 405 (2004)

MARKYOURCALENDAR

Stephen M. Reams is speaking on Construction Project Finance and the Impact of NAFTA at

the Trilateral Symposium at Universidad Pan Americana, November 10-11, 2004, Guadalajara,

Mexico.

Brian K. Fielden is presenting Managing Risk in Hotel Development and Construction at the

Academy of Hospitality Industry Attorneys November 2004 Meeting, November 11-13, Dallas,

Texas.

Robert L. Crewdson and Brian K. Fielden will present Managing Risk in Hotel Development

and Construction at the Americas Lodging Investment Summit, January 18-20, Los Angeles,

California.


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INTHENEWS

Partners John I. Spangler III, William H. Hughes, Jr., and Robert L. Crewdson were all recognized in

Best Lawyers in America 2005-2006in the area of construction law.

Robert L. Crewdson presented Construction War Stories II -- Another Year, More Stories at the 2004

ICSC U.S. Law Conference in Hollywood, Florida.

Jonathan D. Crumly, Sr. presented Evidence in the 21st Century: a Construction Lawyers Guide at the

May 2004 American Bar Association Forum on the Construction Industrys Annual Meeting in Scottsdale,

Arizona.

William H. Hughes, Jr. presented A Practical Course of Action for Claim Prevention and Avoidance at

the national conference of the Construction Management Association of America (CMAA) in San Antonio,

Texas on September 13, 2004.

Robert L. Crewdson and William H. Hughes, Jr. made presentations at the Institute for Continuing

Educations Construction Law for the General Practioner seminar in Atlanta on October 14, 2004. Mr.

Crewdson also chaired the seminar. Associate John S. Ducat III co-authored written materials.

Jonathan D. Crumly, Sr. co-authored Preventing War Over Mold Claims, an article appearing in the

July 2004 New York Law Journal.

Jonathan D. Crumly, Sr. was quoted extensively in a front page article in August 30, 2004, edition of

the South Carolina Lawyers Weekly reporting on the Patten Gradingdecision (see Case Updates for

details of the decision).

CONSTRUCTION TIPS: LIEN WAIVERS: WHAT DO THEY REALLYMEAN?

Lien waivers are a staple of construction projects. Everybody knows the importance of obtaining a lien

waiver, although many owners and contractors never bother to collect them. But where do the waiver forms

themselves come from? And what do they really mean? Unfortunately, many owners, contractors and

subcontractors cannot really answer these questions, and the consequences are often devastating.

The most generic form of lien waiver simply waives a contractors right to assert lien claims on a project.

For interim pay applications, this waiver of lien rights might extend through the date of the waiver, or

might be effective only to the extent of payment. This is an important distinction with a difference. From

the owners perspective, it is preferable to use a lien waiver form that waives lien rights through the date

of the waiver, as this may serve to waive lien rights for as yet unresolved claims for extras or delay. A

contractor, however, will want to limit the lien waivers coverage to the payment that is being received.

Owners can obtain additional protection by including language that waives contract claims as well as

lien claims on the project, through the date of the lien waiver. The purpose of this additional language

is to bring the project current and give the owner comfort that no hidden or unknown claims exist at

the time of each progress payment, or at the time of nal payment.


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In these cases, it is important that a contractor read the waiver form, and understand the difference

between a lien waiver and a claim waiver. When the waiver releases contract claims as well as lien

rights, the company signing the waiver will have released its right to recover costs or damages for

pending change orders or delay claims that are otherwise being submitted or processed on the project

The waiver could result in an inadvertent and unintentional release of claims under the contract that are

otherwise entirely valid.

These waivers are enforced according to their terms like any other legal document, particularly because

waivers are sworn documents. Courts are loath to allow an attack by a contractor on its own sworn

lien waiver. Therefore, when signing a waiver that includes a release of contract claims (as well as lien

rights), a contractor should carefully list and exclude those claims and matters that are still pending. Mos

owners nd the list of excluded claims to be acceptable, as their main intent in using the claim waiver is

to obtain information on claims that might be in the ofng. Owners should ensure that this list of claims

is as specic as possible to preclude any argument as to what is included in that claim at a later date.

Another issue regarding lien waivers that requires careful attention is the issue of whether the state in

which the project is located has restrictions on the type of waivers that can be used. For example, in

the South, Georgia and Florida have statutory lien waiver forms, and the statutes generally provide that

all waivers must be substantially in the form provided in the statute to be effective. In the West, Arizona

and California have very strict requirements on the form of a lien waiver. There are a few other states

with similar requirements. If a waiver contrary to the terms of these statutes is used, it will be deemed

unenforceable.

Most of the statutory waiver forms are merely waivers of lien, and not claims. While these statutes often

do not speak to the issue of whether claim waivers can be included in a waiver form (and there are no

cases bearing on this issue at the present time), Arizona and California do, in fact, prohibit claim waiv-

ers. Other states, like Florida and Georgia, do not seem to prohibit claim waivers, although there are

no cases that would permit a nal answer to this question. Additional states will likely pass lien waive

form provisions in the future, and a contractor going into any state for the rst time should always check

to make sure their form complies with any statute that exists.

Owners and contractors should pay careful attention to the lien waivers used on every project they under

take. If statutory lien waivers are required, the parties should ensure they have the proper forms. They

should read and analyze the lien waivers to obtain a clear understanding of what rights and claims are

being waived every month. If owners and contractors pay close attention to statutory requirements, and

the contents of lien waivers, they can avoid unintended and potentially devastating consequences.

Aubrey B. Wadde


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Jeffrey A. Belkin

404-881-7388

[email protected]

Deborah Cazan

404-881-7667

[email protected]

Brook A. Clark

212-210-9462

[email protected]

Robert L. Crewdson404-881-7291

[email protected]

Jonathan D. Crumly, Sr.

404-881-7336

[email protected]

ATLANTAOne Atlantic Center1201 West Peachtree Street

Atlanta, GA 30309-3424404-881-7000

CHARLOTTEBank of America Plaza101 South Tryon StreetSuite 4000Charlotte, NC 28280-4000704-444-1000

NEW YORK90 Park AvenueNew York, NY 10016-1387212-210-9400

RESEARCH TRIANGLE3201 Beechleaf CourtSuite 600Raleigh, NC 27604-1062919-862-2200

WASHINGTON, D.C.601 Pennsylvania Avenue, NNorth Building, 10th FloorWashington, D.C. 20004-260202-756-3300

www.alston.com

If you would like to receive future Construction Law Reviews electronically, please forward

your contact information including e-mail address to [email protected]

Be sure to put subscribe in the subject line.

MEMBERS OF ALSTON & BIRDS CONSTRUCTIONAND GOVERNMENT CONTRACTS GROUP

Alston & Bird LLP 2004

Daniel F. Difey

404-881-4703

[email protected]

John S. Ducat III

404-881-4934

[email protected]

Brian K. Fielden

404-881-7496

[email protected]

J. Andrew Howard404-881-4980

[email protected]

This Construction Law Reviewis published by Alston & Bird to provide a summary of

signicant developments to our clients and friends. It is intended to be informational

and does not constitute legal advice regarding any specic situation. This material

may also be considered advertising under the applicable court rules.

John I. Spangler, III

Practice Group Chair

404-881-7146

[email protected]

William H. Hughes, Jr.

404-881-7273

[email protected]

Daniel J. ONeill

212-210-9522

[email protected]

Stephen M. Reams

404-881-7731

[email protected]

Aubrey B. Waddell404-881-4932

[email protected]
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