Common sense contracting - summer 2015

www.smithcurrie.com Atlanta | Charlotte | Fort Lauderdale | Los Angeles | Raleigh | San Francisco | Washington, DC VOLUME 28 NUMBER 4 WINTER 2015 Inside This Issue 780 – First Things First: Registration and Licensing Requirements for Contractors Working in Foreign Jurisdictions. Although performing construction work across state lines can be profitable, each state imposes unique licensing and registration requirements for contractors and professionals. 781 – No Harm, No Foul? – Penalties for Noncompliance When Performing Construction in a Foreign Jurisdiction. Contractors and professionals who do not comply with state and local licensing and registration requirements may be prevented from recovering payment for their work. 782 – Bidding and Performing Public Works Contracts in Other States. Construction projects with public owners or with public funding present unique challenges for unwary contractors and professionals. 783 – Collecting Judgments Across State Lines. What does a creditor need to do to collect on a favorable judgment against a debtor’s out-of-state assets? 784 – Different States Impose Different Limitations on Indemnity and Additional Insured Provisions. Construction contracts routinely include indemnity and additional insured provisions to transfer risk, but these provisions must be tailored to comply with state-specific requirements. 785 – Licensing Challenges for Multi-State Design Practices. The ins and outs of state regulation of architects, engineers, and design professionals. First Things First: Registration and Licensing Requirements for Contractors Working in Foreign Jurisdictions 780 Construction companies’ increasing opportunities to perform work across state lines poses unique challenges and requirements, not the least of which are general business registrations and licensing requirements. While the exact requirements will vary from state-to-state, virtually every state requires some type of business registration and licensure. And while these requirements may seem like the proverbial “busywork” mandated by the controlling jurisdiction, severe penalties exist for contractors that fail to satisfy these requirements. General Types of Registration and Licensure Requirements | Registration and licensing requirements fall into two broad categories: (1) General business registrations filed with the Secretary of State and municipality and (2) Construction specific licenses. General business registrations entail paying a fee for the right to do business in a state and must be paid annually. Most states also require a foreign company to provide a registered agent who is authorized to accept service of process. These general business requirements apply to all foreign companies doing business in the state, 2 regardless of whether the company carries out any construction activities. The purpose of general business registration requirements is to provide revenue to the state or municipality. Failure of a company to comply with the business registration requirements generally results in a yearly fine and may preclude the company from pursuing affirmative legal actions against other entities in that state. As discussed more thoroughly in No Harm, No Foul? – Penalties for Noncompliance When Performing Construction in a Foreign Jurisdiction. Common Sense Contracting, December 2014,a company’s failure to properly register may result in a waiver of potential claims. Companies have a variety of options when determining how to satisfy the business registration requirements. The simplest option is for the company to register as a foreign company doing business in the state. This generally requires the company to pay an annual fee and provide a registered agent. Where used, the foreign company continues operating all aspects of the business and remains liable for all debts incurred in the foreign jurisdiction. Another option is for the foreign company to create a new entity in the foreign jurisdiction. This entity can take a variety of forms, including a limited liability company or corporation. Each type of entity has advantages and disadvantages, depending on the overall purpose of the entity and the specific requirements and taxes of the jurisdiction. By creating a separate entity, the foreign company provides additional protection against losses incurred in the foreign jurisdiction. Registration requirements may often be found on the secretary of state’s webpage and, for municipalities, on the respective chamber of commerce websites. States also require construction companies to comply with licensure requirements. These vary depending on the construction discipline, but almost always require the company (or a company employee) to obtain a certification by taking and passing a licensure examination. Licensing requirements apply not only to general contractors, but often to specialty contractors including electricians, plumbers, mechanical contractors, HVAC contractors, home repair contractors, architects, engineers, construction managers, surveyors, landscapers, and interior designers. The overarching purpose of licensure requirements is to assist in guarantying minimal standards of quality to help protect the public interest. The section below briefly addresses considerations when seeking registration. Considerations When Seeking ConstructionRelated Licensure | There are hundreds, if not thousands, of various licensing requirements at the state and municipal levels, making it critical for a construction company to research not only state requirements, but also local municipality requirements as well. Further, many state agencies, most often the state Department of Transportation, require additional qualifications or licensure prior to a company bidding a job. Setting aside the more obvious state licensing requirements, companies today must insure that they comply with the specific municipal requirements as well. These municipal registration requirements often take the form of an additional license fee. For instance, in John Fithian Contracting Co. v. City of Salem, No. 07 CO 33, 2008 WL 4416055 (Ohio Ct. App. Sept. 25, 2008), the Ohio Court of Appeals allowed enforcement of a municipal regulation requiring registration and licensure for an excavation subcontractor. The Court of Appeals upheld the regulation despite the fact that there were no statewide licensure or registration requirements applicable to the excavation subcontractor performing the work. Thus, the absence of any state statute requiring registration or licensure for a particular project or work should not be taken to mean that there are no other licensure or registration requirements, including those imposed by municipalities and agencies. One area that frequently impacts construction companies doing business in foreign jurisdictions is reciprocity. Many states have reciprocity provisions allowing a company to avoid some, or sometimes all, licensure requirements if the company is licensed in another state. More often, however, states will allow the company to waive particular portions of the test but require the company to complete a test or certification on state specific requirements. Companies should also examine exceptions to licensure requirements. Many states, such as Tennessee, provide licensure exceptions in certain situations. For instance, no license is required for construction management when the total project value is below $25,000. Similarly, no separate license is needed for masonry subcontractors where the total project value is below $100,000. It is important to check the specific requirements, as a state may require additional licensing for specific types of work that other states may include in a more generic general contractor’s license. While the specifics will vary from state to state, common examples include residential roof repair, residential plumbing, residential electrical, HVAC, and masonry. Another option for companies seeking to do business in a foreign jurisdiction but that wish to avoid the hassle and expense of completing the licensure process is to partner with a licensed entity to carry out business using that entity’s license. Where permitted, this allows the foreign company to “rent” the license of the licensed contractor. This approach, while avoiding the testing requirements for licensure, also has additional considerations, including insurance, indemnification, disbursement, and liability concerns. Companies wishing to proceed using this partnership or joint venture model should memorialize the relationship in a partnership or joint venture agreement. Conclusion | Companies are increasingly doing business across state lines, making an understanding of business registration and licensing requirements essential to a successful project. Increasingly states and municipalities are requiring multiple types of registration and licensure for foreign companies, particularly if the company is involved in the construction industry. The exact requirements will vary between states and municipalities, but general requirements include a foreign business registration as well as a contractor’s license. These should be obtained prior to bidding or performing any work in order to avoid both fines and penalties for non-compliance. Insuring compliance with registration and licensing requirements before beginning to operate in a foreign jurisdiction will avoid costly headaches later on. Lochlin B. Samples 404-582-8116 [email protected] Member of the State Bars of Georgia and Tennessee No Harm, No Foul? – Penalties for Noncompliance When Performing Construction in a Foreign Jurisdiction 781 An avoidable disaster: A well-respected, hardworking engineer designs and installs a system that meets and exceeds an owner’s contractual requirements. The project was located out-of-state for the engineer, but the promised fee justified the effort. In a rush to meet the project requirements, the engineer failed to 3 confirm and follow the state registration and licensing requirements. After completion, the owner refuses to pay, arguing that the contract is illegal and void due to the engineer’s failure to obtain and maintain a license in this foreign state. The engineer is baffled and asserts that the system is better than the owner asked for – no harm, no foul, right? Unfortunately for the engineer, the owner has a viable argument. Penalties for noncompliance with a state’s registration and licensing requirements can be harsh and must be considered prior to performing work in a foreign state. The Purposes of Government Regulation Shape the Penalties for Noncompliance | To understand the penalties, it helps to understand the different purposes of registration and licensing requirements. Government regulation of construction serves two purposes. One is to protect the general public from the potential hazards related to construction such as personal injury and property damage. Another is to produce revenue to the government from construction activity. While regulation exists in many forms and varies by state, every state requires construction contractors and professionals to register and obtain pertinent licensure. The purposes served by the registration and licensing requirements largely dictate the different penalties for noncompliance. For example, every state requires foreign entities that transact business in the state to obtain some type of certificate of authority. This ensures that the state maintains a record of contractors performing work in the state while also producing revenue to the state from registration fees and taxes. Failure to comply at the time of contract execution typically does not result in the unenforceability of a contract for services. See Custom Track, Inc. v. Vulcan Mining, Inc., 62 Wash. App. 208, 813 P.2d 626 (1991). In Vulcan Mining, a rock-crushing contractor that failed to register under Washington’s contractor registration act could still recover in a suit to collect payment from a mining company. The court looked to the purpose of the registration act and observed that the act was intended to prevent the “victimizing of a defenseless public by unreliable, fraudulent and incompetent contractors.” The court found the act’s purpose did not apply to the relationship between the contractor and mining company, which was essentially a joint venture. Further, the failure to comply with registration requirements will likely only preclude recovery until compliance is satisfied. The court in Charles W. Smith & Sons Excavating, Inc. v. Lichtefeld-Massaro, Inc., 477 N.E.2d 308 (Ind. Ct. App. 1985) followed the majority rule that the 4 failure of a foreign entity to obtain a certificate of authority by the date it filed its complaint merely suspended, rather than barred, legal proceedings until such time as a certificate is obtained. Nonetheless, noncompliance with registration acts may carry serious ramifications if lien statutes are relied upon for recovery. In one case, the failure to obtain a certificate of authority led the court to find that a party “simply has no lien to claim” because such claims only exist for those who comply with the registration act. Space Planners Architects, Inc. v. Frontier Town-Missouri, Inc., 107 S.W.3d 398, 403 (Mo. Ct. App. 2003). As licensing carries obligations to the public that typically exceed registration requirements, licensing requirements are generally enforced more strictly than registration requirements with harsher penalties. For example, the court in Dist. Bd. of Trustees v. Morgan, 890 So. 2d 1155 (Fla. Dist. Ct. App. 2004) observed that when an out-of-state architect fails to comply with Florida’s licensing act, the architect can neither recover under Florida’s lien statute nor recover for breach of contract. In that circumstance, the unlicensed person has no right to enforce a contract for services that required a license. However, the court refused to find that a licensed architect’s mere failure to obtain a certificate of authorization invalidated the contract or otherwise precluded recovery. The court emphasized that the lack of a certificate of authorization does not create a risk to the general public similar to that of an unlicensed architect. All states require engineers and architects to be licensed, but not all states require contractors to be licensed. Thus, contractors must understand licensing requirements prior to pursuing out-of-state work. In some jurisdictions, the failure to have a required license when a bid is submitted – as opposed to when work is performed – is a violation of the licensing requirements and could jeopardize the contract award. The court in AED, Inc. v. KDC Investments, LLC, 155 Idaho 159, 307 P.3d 176 (2013) found that a demolition contractor’s failure to be properly licensed at the time it submitted a bid resulted in the blasting contract being illegal and unenforceable. Further, the fact that the contractor obtained a license after contract execution did not change this result. Some jurisdictions, however, temper the harshness of noncompliance penalties by recognizing the doctrine of substantial compliance with licensing requirements. Application of the substantial compliance doctrine is also predicated on the purpose served by licensing requirements. For example, in DeReggi Const. Co. v. Mate, 130 Md. App. 648, 747 A.2d 743 (2000), the court recognized that substantial compliance of licensing requirements is sufficient for a contractor to maintain a cause of action for nonpayment. The court found that although the contractor did not obtain a license prior to contract execution, the contractor did obtain a license prior to commencement of work and completed the work in a professional manner. Accordingly, the court found that the purposes of the licensing act were served in this case. Substantial compliance with licensing requirements, if recognized in a jurisdiction, is fact dependent and should not be relied upon unless necessary. Essentials for Compliance | It is essential that registration and licensing requirements be understood at the earliest point possible. Although out-of-state work can be profitable, failing to comply with a state’s requirements may leave an out-of-state contractor without any recourse for payment after work is completed. Thus, it is vital to determine the precise requirements of the foreign state including: obtaining a certificate of authority prior to pursuing out-of-state work and bidding on a project; understanding whether and when an out-of-state license is required; understanding whether your firm and an employee or principal of your firm must have a license; understanding whether a city, county or other local registration or license may also be required; understanding the costs and time associated with obtaining the registrations or licenses, including any bonding or insurance requirements; understanding whether joint venturing or partnering with an in-state registered or licensed entity may be beneficial; understanding the obligations imposed by the required registration and licensing; understanding the requirements to keep required registration and licensing in effect; and understanding the consequences of a violation of the registration or licensing requirements with respect to recovery for nonpayment. Conclusion | If an out-of-state construction contractor or professional performs all contractual requirements but does not obtain required state registration and licensing requirements, there is significant risk that the penalties for noncompliance may preclude recovery for such work. Stated differently, the no harm, no foul rule is too risky to rely upon. State licensing and registration requirements differ and must be understood prior to pursuing work out-of-state. The requirements differ largely because the purposes that states place on licensing and registration differ. Similarly, a court’s strict enforcement of licensing and registration requirements may exist in one factual scenario, but substantial compliance with such requirements may be found adequate in another factual sce- 5 nario. While the benefits of out-of-state work may merit the pursuit of such projects, complete understanding of the state registration and licensing requirements prior to pursuit of such projects is essential for success. Steven J. Stuart 404-582-8140 [email protected] Member of the State Bars of Georgia, Tennessee and the Bar of the District of Columbia Bidding and Performing Public Works Contracts in Other States 782 Working in a new state can present many new opportunities, but it also comes with many challenges. You cannot assume that the new state’s laws will be identical to your own. Some issues that might come up include: registration and licensing requirements, antiindemnity statutes, bonding and lien requirements, and public policy limitations on contract clauses such as payif-paid clauses, liquidated damages clauses, or no-damages-for-delay clauses. It is critical to be aware of any differences because you may be exposed to penalties or lose rights and remedies you are used to having. It is a good idea to familiarize yourself with the laws governing construction contracts in the new state—there may be obligations in those laws not found in your contract. It is also important to pay special attention to which laws apply to what types of projects. Most states have separate laws for procurement of construction versus other procurements, separate laws for transportation projects versus building construction, and separate laws for public projects versus private projects. You should also note what project delivery methods are available in other states such as public private partnerships (P3s), direct negotiations, reverse-bid auctions, and build-operate-transfer projects. This article focuses on some issues that come up when bidding and performing public works contracts in other states: preferences for in-state contractors, tax exemption issues, and false claims acts. Preferences for In-State Contractors | Some states have a preference for in-state contractors. Florida has a statutory preference that requires state and local officials to give preference to Florida residents, provided that the purchase can be secured at no greater expense and at a comparable quality. Georgia, alternatively, does not give a preference to the award of construction contracts to local contractors, but there is a strong policy preference that the state use—insofar as is possible—Georgia products and labor. In some states, these provisions have been invalidated by court decisions—finding that such provisions violate the privileges and immunities clause of the United States Constitution. Reciprocity can be an issue. Some states, such as California, will give preference to in-state contractors when an in-state contractor is competing with a contractor whose state gives an in-state preference. An added layer of complexity applies to joint ventures. Do all the members need to be resident contractors or is one sufficient? States differ. Louisiana requires that all members of the joint venture be state residents to get the benefit while Alaska requires just one. Because being a resident contractor can be beneficial, it is important to know what qualifies a contractor as such. For example, Georgia requires a business to maintain a place of business in Georgia for at least one year prior to any bid or proposal—post office boxes, site trailers, or temporary structures don’t count. Given the possible benefits, a contractor should consider taking the necessary steps to qualify as an in-state contractor or find a joint venture partner before bidding on public projects in another state. Tax Exemption Issues | When the owner of a project has a tax exempt status, it is common to structure the contract to eliminate the sales tax on materials by either having the owner purchase the materials or having the contractor purchase the materials as the owner’s agent. Because every state has different tax regulations it is very important to be familiar with them so that the contract can be structured to take advantage. Tax exemptions can result in a large cost savings on a project if sufficient planning efforts are taken. Tax exemptions in different states can vary widely. For example, it is important in Utah for the owner to not only take legal title to the materials with the right to use them, but assume the burden of risk. West Virginia, alternatively, requires the taxes to be paid first, but allows the contractor to claim applicable exemptions after paying the sales tax. False Claims Act | Any contractor who does federal projects should be familiar with The Federal False Claims Act. Approximately 30 states have enacted their own false claims act. Even individual counties have enacted their own false claims ordinances. False claims 6 ation of having obtained a judgment against an owner, general contractor, or subcontractor in one state only to find out that the debtor has moved its operations or assets to another state to avoid its creditors. While this is an unavoidable challenge when working in different states, there are four basic steps a business can take to help ensure that its foreign judgment can be collected across state lines. • Step 1 - Domesticate/register the foreign judgment in the Debtor’s new “home” state. • Step 2 - Have the judgment recorded in the “new” state’s property records. • Step 3 - File a garnishment action. • Step 4 - Serve post-judgment discovery or take a post-judgment deposition. Step 1 - Domesticate/Register the Foreign Judgment | Given the prevalence of debtors moving their operations or assets from one state to another to avoid judgments, all but a handful of states have now adopted the Uniform Enforcement of Foreign Judgments Act which was created to help combat this problem. The Act allows judgments obtained in one state to be domesticated in another state with the domesticating state giving the judgment “full faith and credit” as if the judgment was rendered by the state’s own courts. The Act has proven to be very effective in preventing debtors from evading their payment obligations by simply relocating to another state. Most states which have adopted the Act have done so by incorporating its provisions into their own state statutes and by requiring that the debtor have some connection with the forum state where domestication is sought, such as residing or having assets in the forum state. In most states, domestication actions filed under the Act are very streamlined and require only that notice be given to the debtor that the foreign judgment is being domesticated in the forum state. In Georgia for example, the creditor is required to obtain an authenticated copy of the judgment from the state of origin and file an affidavit and notice of filing foreign judgment which are simple forms to complete. After notice of the domestication action is given to the debtor (and assuming there is no objection filed by the debtor) the court will enter an order affirming that the foreign judgment has been domesticated and is recognized as fully enforceable in Georgia. In situations where a creditor is trying to domesticate a judgment from a state which has not adopted the Act (i.e. California) many states such as Georgia have simplified procedures whereby a “foreign judgment lawsuit” can be acts and ordinances are used to prosecute fraud against the government and provide “whistleblower” protection to anyone who brings the fraud to the government’s attention. False claim acts not only provide actions by the government against a contractor, but allow for private individuals to bring lawsuits (known as qui-tam actions). Florida, for example, has The Florida False Claims Act which is substantially similar to the federal law. Miami-Dade County has its own ordinance, which applies to any person who “knowingly presents or causes to be presented to the County, or to any officer, employee, agent, or consultant of the county, a false or fraudulent claim for approval.” Other Florida ordinances include Broward County, Hallandale Beach, and Bay Harbor Islands. One area to watch out for is called certification liability. To receive payment the contractor must sign a certification that warrants the contractor complied with certain provisions of the contract, or perhaps all provisions depending on how the certification is written. A fraud claim can arise if any provision was not complied with, even if it is insignificant or unimportant to completion of the project. To avoid any liability for certification liability, it is important to state exactly what contractual requirements are material to payment in the contract, and therefore spell out explicitly what the contractor is certifying each time they request payment. Another way to avoid liability under a false claims act is to make sure everything is documented in writing. It is common on a project to resolve difficulties through discussing the matter. If those discussions are then written down, fraud claims against a contractor for failing to comply with the contract can be avoided. Summary | It is very important to familiarize yourself with the laws of any state in which you plan to work as they can be drastically different from the state you are used to. This article presents just a small sample of things to look out for when working in another state. Todd M. Heffner 404-582-8146 [email protected] Member of the State Bar of Georgia Collecting Judgments Across State Lines 783 Introduction | In recent years, many in the construction industry have found themselves in the situ- 7 filed to give the foreign judgment full faith and credit. Judgments obtained in out-of-state federal district courts are not “domesticated” but are “registered” between federal courts and are also enforceable as if the judgment was rendered in the forum state. In fact, the process of registering a judgment between federal courts is even simpler than what is required to domesticate a judgment between state courts. Registering judgments between federal courts is controlled by 28 U.S.C. § 1963, which unlike some state court domestication procedures, does not require notice be given to the debtor of the registration. Not having to provide notice is very advantageous to a creditor that may be able to take actions (i.e. file a garnishment action) to collect on its judgment before the debtor has an opportunity to hide assets or otherwise thwart the collection process. The registration process is so streamline that many district courts have simple forms on their websites for creditors to use to request that a “Certification of Judgment” along with a certified copy of their judgment be sent to the federal court in the district where registration is sought. Once registered, the district court will open a new case for the judgment (as if the judgment was obtained in state) whereby the creditor can serve post-judgment discovery and engage in other collection activities. Domestication or registration of foreign judgments should be done immediately. Most states have very strict and sometimes short statutes of limitations periods relating to foreign judgments. Therefore, a creditor should take immediate action after learning of a debtor’s out-of-state location. Step 2 - Recording the Foreign Judgment | After a creditor has domesticated or registered its foreign judgment the next step is to immediately record the judgment. Most states have a process whereby a judgment can be recorded in the property records of a particular county (or counties) where the debtor owns real property or has assets. Recordation puts other creditors on notice of the judgment and reserves the creditor’s place in line for the distribution of any assets which the debtor may have. In most states “first in time - first in right” is the rule for collections making immediate recordation essential. Each state has its own method for recordation with the document memorializing the judgment being known by many different names. In Georgia for example, the recorded judgment is known as a “Writ of Fieri Facias” or “Writ of Fi.Fa.” for short. In Alabama, judgments are recorded with a “Certificate of Judgment.” Many federal district courts issue a “Writ of Execution” after the judgment is registered. Judgments which are recorded are oftentimes paid following a title search by a lender contemplating making a loan to or financing a debtor’s enterprise. The lender, after discovering the judgment, will frequently contact the creditor’s attorney and attempt to broker a deal between the creditor and debtor in order for a loan (or other transaction) to be finalized. This can occur years after the judgment has been recorded. Once recorded, it is important to be aware of the lifespan of a judgment and the forum state’s renewal process. In Georgia, judgments have a lifespan of seven years with a three year grace period. In Mississippi, judgments are good for seven years and in Tennessee ten years. To renew a judgment in Georgia, a creditor must have the sheriff of the county where the judgment is recorded attempt to collect on the judgment before the seven year lifespan expires before the Writ of Fi.Fa. can be re-recorded. Step 3- File a Garnishment Action | The quickest and most efficient way for a creditor to collect on a foreign judgment is through the process of garnishment. Garnishments oftentimes come as a complete surprise to unwitting debtors who find that their bank accounts are frozen and that they are unable to make payroll or satisfy other obligations. A successful garnishment results not only in the creditor seizing any money (and the contents of any safety deposit boxes) on deposit with the garnished bank, but can also lead to a debtor being willing to work out a payment plan to avoid future collection activities. Most states have two types of garnishment actions which are applicable to the construction industry. The first is a regular garnishment (usually served upon a bank) which requires the garnishee to freeze any accounts belonging to the debtor or to withhold any money which may be due the debtor to satisfy the judgment. A regular garnishment can also be served on any party involved with a construction project (e.g., owner, general contractor, or subcontractor) which owes, or will owe any money to the debtor for its work or materials. Garnishments filed against construction projects can result in a debtor being forced to complete its work knowing that any monies earned will be used to pay off a judgment from a previous project. Debtors faced with this dilemma are oftentimes willing to work out a deal to avoid taking a complete loss on a current project and to save face with those who have employed their services. The second type of garnishment is a wage garnishment. Wage garnishments are applicable to the construction industry in situations where the creditor may have obtained a judgment against an individual through a personal guarantee or otherwise. Oftentimes, an individual after having a judgment entered against them personally will go to work for someone else. A creditor upon learning where the debtor is working can file a wage garnishment and receive a portion of the debtor’s disposable income (up to 25% in Georgia) every month (or so) until the judgment is paid in full. In most cases, a debtor is not going to quit a steady job in order to avoid a wage garnishment. Instead, the debtor will usually continue to work at his or her job resulting in the creditor collecting a portion of the debtor’s income every month until the judgment is satisfied or a compromise has been reached. Step 4 - Serve Post-Judgment Discovery | Most state and federal jurisdictions have provisions allowing creditors to learn about a debtor’s assets through the process of post-judgment discovery. Post-judgment discovery can take the form of written interrogatories which must be answered by the debtor under oath or a request for documents regarding the debtor’s assets. Postjudgment depositions are also a powerful tool to discover assets. With depositions, debtors do not know ahead of time what questions will be asked and may not have time to think of evasive answers to thwart the collection process. In fact, it is not uncommon for debtors to agree to a settlement or to simply pay a judgment before having to respond to written discovery, or even worse, sit for a day-long, post-judgment deposition. Collecting foreign judgments is a challenge for those doing business across state lines. The steps outlined in this article, if taken, can significantly increase the chances of a successful outcome. Joseph J. Dinardo 404-582-8051 [email protected] Member of the State Bar of Georgia Different States Impose Different Limitations on Indemnity and Additional Insured Provisions 784 Indemnity provisions, also known as hold harmless agreements, are frequently included in construction contracts to transfer the risk of third-party claims. Indemnity agreements involve a promise by which one party (the indemnitor) makes another party (the indemnitee) 8 whole for a loss that the other party has incurred as a result of a third-party claim. Indemnity provisions offer the parties an opportunity to transfer the risk of loss to the party best-suited to bear the risk. In the same way, additional insured requirements can be used to transfer risk from a negligent party to another party’s insurance carrier. While these concepts appear simple, the treatment of such provisions varies from state to state based on applicable statutes and court decisions. Indemnity Agreements | While standard form indemnity provisions are available, these provisions are often negotiated and can look quite different depending on the extent of indemnification. An indemnity provision can be drafted broadly to indemnify the indemnitee for all claims, costs, losses, and damages that result from either party’s negligence, even if the indemnitee is solely responsible for the third-party’s injury. An intermediate provision will specify that the indemnitor agrees to indemnify the indemnitee for all claims, costs, and damages resulting from either parties’ negligence, except where the indemnitee is solely at fault. A more restrictive provision will provide that the indemnitor only agrees to indemnify the indemnitee if the indemnitee bears no responsibility for the claims, losses, and damages. Which option is used may be influenced by the type of antiindemnity statute in the applicable jurisdiction. Anti-Indemnity Statutes | Whether an indemnity agreement will be enforced may depend on whether the governing state law limits enforcement of indemnity agreements. The various states deal with indemnity agreements in one of three ways: (1) the state does not have an anti-indemnity statute; (2) the state has an anti-indemnity statute that prohibits an indemnitor from indemnifying an indemnitee for the indemnitee’s sole negligence; or (3) the state prohibits an indemnitor from indemnifying an indemnitee for the indemnitee’s own negligence, regardless of degree of fault. Given the prevalence of indemnity agreements in construction contracts, all parties involved should be aware of the law governing each of their projects. States With No Statute | While the majority of states have some form of anti-indemnity legislation governing construction contracts, there are currently eight states that do not have a true anti-indemnity statute. However, the lack of an anti-indemnity law does not mean that any and all indemnity agreements will necessarily be upheld. Courts throughout the country tend to narrowly interpret provisions which attempt to indemnify an indemnitee for its own negligence. For instance, most courts will not construe an indemnity agreement to indemnify a party 9 for its own negligence unless such intention is expressed in “clear and unequivocal terms” as is the case in Maine, or, as in Nevada, the result is “very clearly intended.” States Prohibiting Sole Negligence Only | There are fifteen states that prohibit an indemnitee from requiring others to indemnify the indemnitee for its own sole negligence. Unlike the states with no statute, and no matter how clearly the parties’ intentions are stated, courts in these states will invalidate any agreement by one party to indemnify another party for its own sole negligence. The reasoning behind such refusal is that to allow otherwise would be a violation of public policy. States Prohibiting Sole And Partial Negligence | Finally, a majority of states prohibit indemnity for both sole and partial negligence of the indemnitee. In these states, an indemnitor can be required to indemnify the indemnitee only to the extent of the indemnitor’s own negligence. These states have determined that it is against public policy to require a non-negligent party to be responsible for an act or omission for which it was not at fault because an indemnitee who knows that another party is ultimately responsible for the indemnitee’s negligent acts (or omissions) may not act as carefully as it otherwise might if it knew it would be responsible for its own acts. In addition, these statutes were enacted to prevent the lower-tier party (a contractor or subcontractor), presumed to have the weaker bargaining position, from being obligated to indemnify an upper-tier party (owner or contractor) for its own wrongdoing. Despite the restrictions of anti-indemnity statutes, many states still allow owners (and other upper-tier project participants) to be named as additional insureds under the contractor’s or subcontractor’s comprehensive general liability (“CGL”) insurance policy, which may provide greater coverage. Insurance and Anti-Indemnity Legislation | Many indemnitees attempt to secure the indemnitor’s indemnification promise by requiring that the indemnitee procure contractual liability coverage as part of the indemnitor’s CGL insurance policy. In addition to requiring insurance of the indemnification agreement, many owners and contractors also require that they be named as an additional insured on the contractor’s or subcontractor’s CGL policy. Although an obligation to indemnify is different than an obligation to procure insurance, many of the same states that legislatively invalidate clauses purporting to indemnify another party for its own fault will nevertheless allow agreements to procure insurance that effectively provide the same kind of protection. For instance in Georgia, while an agreement that requires one party to indemnify another for a loss caused by the indemnitee’s sole negligence is void and unenforceable, the law does not apply to any insurance agreement. Even in the case of willful misconduct, Hawaii allows for such coverage in CGL policies. Conclusion | A clear statement of the parties’ intent is paramount to having an indemnity agreement upheld. Since indemnity provisions tend to reverse the generally preferred rule that wrongdoers should pay for their own mistakes, courts often strictly construe indemnity language. Loose language used in defining the indemnity obligations may result in a restrictive reading of the scope of the parties’ indemnity agreement. Therefore, it is essential to understand the scope of the risk that is intended to be subject to the indemnity clause and define it clearly. Even a clearly stated indemnity agreement may not be enforced if it violates a state’s anti-indemnity statute. An additional insured requirement may be enforced even though an indemnity clause is barred. Sarah E. Carson 919-256-3696 [email protected] Member of the State Bars of Georgia, North Carolina, and the Bar of the District of Columbia Licensing Challenges for Multi-State Design Practices 785 Architects and engineers, typically contract to provide professional design services in a number of states and are, therefore, subject to each state’s licensure laws. It is important for design professionals to be aware of state-specific differences in licensing before entering into contracts in new jurisdictions. Penalties for non-compliance are severe and can reduce or eliminate a design professional’s right to payment under a contract. Requirements for Licensing | Each jurisdiction has its own state-specific requirements for licensing as well as its own exceptions to licensure. Applications typically require reference forms, verification of educational degree and experience, professional examination score, related background information, and an application fee. Exceptions to licensure, while similar in many states, should be 10 verified by examining state statutes. Individual vs. Firm Licensing | Many states also require any business or firm that offers design services to be licensed as a professional design firm in that state. There may be separate requirements for firm registration that may include residency or a requirement that a certain percentage of firm members be licensed in a state. If a firm provides both architectural and engineering services, the firm may need to apply for a separate license for each discipline. Note that, in many states, a firm or business using variations of the words “architect” or “engineer” in its business name must be registered as a professional design firm even if it does not offer design services. Firm licensing is wholly separate from individual licensing. Firms cannot rely on the licensing of individuals within the firm to meet firm licensing requirements in a particular state. Similarly, design professionals not licensed in a state cannot practice there in reliance on their firm’s licensing in that state. Exceptions to firm licensing can include sole proprietorships, where an owner does business in his or her own name, or design/build firms. However, this varies from state to state and should be verified before practicing in a foreign jurisdiction. Unlicensed Bidding | Depending on the state, a design professional licensed in another state may be able to bid on a contract without being licensed in that state, as long as he or she completes registration before services are performed and before a contract is signed. States that allow unlicensed bidding typically require the design professional to submit either a notice of unlicensed bidding or a temporary permit application to the state licensing board. States have different time frames for submitting an application for licensure after notice is given to the state licensing board. But the majority of states prohibit unlicensed bidding on the theory that a design professional, when bidding on a contract, is offering to engage in professional services. The safest practice is, of course, to become licensed in a jurisdiction before bidding on contracts for design services. Design Professional Acting as a Consultant | Statespecific rules also govern the ability of a design professional who is unlicensed in a foreign jurisdiction to consult a licensed design professional on a project in which the licensed design professional is the principal. If the state does allow for consulting services, the design professional should be careful not to hold himself or herself out as a licensed design professional in that state and must not sign or stamp any documents. Moreover, the design professional should contract with the licensed design professional as a consultant rather than with the client, so as not to have control or supervision over the project. Reciprocity/Comity Between States | A number of states allow design professionals with a license in good standing in another state to obtain its state’s license by reciprocity or comity. State boards typically accept an architect’s National Council of Architectural Registration Board (NCARB) council record or an engineer’s National Council of Examiners for Engineers and Surveyors (NCEES) exam as well as a state-specific application to support the request for licensure. The application usually requests educational information, past work experience, an affidavit or certification that the design professional has a license in another jurisdiction and is in good standing, and an application fee. License Renewal or Reinstatement | If you were licensed in a state more than a year ago, confirm your licensure and take steps to renew your license, if it is no longer valid. Pay attention to the expiration date on your license to avoid a lapse in licensure during renewal. A design professional whose license has lapsed or is inactive may not perform professional services until the license is renewed or reinstated. Timely renewal typically occurs two to three months prior to the license’s expiration. The renewal usually requires the license number, verification of information on file, and a renewal fee. Most states also require the licensed design professional to meet continuing education requirements to be eligible for renewal. Some states will accept the fulfillment of continuing education requirements in another state in which the design professional is licensed as sufficient to meet renewal requirements. If renewal occurs a year or more after the registration renewal date, the state may require reinstatement of the lapsed license, wherein the design professional will be subject to a new application and reexamination. Reinstatement frequently also requires meeting a certain number of continuing education hours. To avoid this, be sure to make the state licensing board aware of any changes of address so that you receive individual and firm renewal notices by mail. Further, take note of whether the state licensing board for each license requires license renewal annually, biannually, or at some other frequency. It is the license holder’s responsibility to renew licenses on time to avoid lapses in licensure. 11 THE PRACTICAL, PLAIN-ENGLISH GUIDE TO UNDERSTANDING CONSTRUCTION LAW In a highly competitive business, knowledge of construction law is essential to running a successful construction business. Released in January 2015, the Fifth Edition of Smith, Currie & Hancock’s Common Sense Construction Law provides a practical introduction to the significant legal topics and questions affecting construction industry professionals. Like its popular previous editions, this Fifth Edition translates the sometimes-confusing legal theories, principles, and established rules that regulate the business into clear, layperson’s English and is widely used in college and university courses to provide an overview of construction law. This edition updates the comprehensive scope of its predecessor editions with new materials addressing:  The evolving risks in design-build projects with new requirements for consideration of long term ownership and operation expense in contractor’s proposals  Examines the emerging Public Private Partnerships (P3) model for constructing large scale projects  Details the increasing complexities involved with international construction projects  Covers the newest industry-standard contract documents produced by ConsensusDocs, DBIA, AIA, and EJCDC with an available electronic link to those forms provided by the publisher, John Wiley & Sons This book, available as an E-book and in hard copy, provides an up-to-date and thorough guide to sometimes intimidating but critical aspects of the practice of construction. Smith, Currie & Hancock’s Common Sense Construction Law, Fifth Edition, gives industry professionals the practical knowledge they need to avoid legal surprises, gain a competitive advantage and orient project personnel. For a better understanding of construction law by anyone engaged in construction, Smith, Currie & Hancock’s Common Sense Construction Law, is the efficient reference for the construction industry. Smith, Currie & Hancock is proud to announce the release of the 5th Edition of Common Sense Construction Law as part of our 50th anniversary celebration. 12 Lien Law and Construction Claims, Annual Construction Professionals Conference and Marketplace, AGC Georgia, April 29, 2015, College Park, GA. S. Gregory Joy, Philip E. Beck and Douglas L. Tabeling. Construction Contracting 101; Davis Bacon/FLSA, Southern Grants Forum, May 1, 2015, Atlanta, GA. Joseph J. Dinardo, Stephen J. Kelleher. Mechanics’ Liens in Florida, National Business Institute, May 12, 2015, Miami, FL. Lisa C. Heron. Terms and Conditions Facing Water/Wastewater Equipment Manufacturers (Panel Discussion), WWEMA (2015 Finance & Contract Administration Council), May 13, 2015, Chicago, IL. Philip E. Beck. Labor Law Seminar, ABC Georgia, May 14, 2015, Atlanta, GA. Joseph J. Dinardo, Timothy W. Johnson, Sarah E. Carson, S. Elysha Luken, Vianney Lopez. FCILB Licensing Course, August 6-7, 2015, Atlanta, GA. Joseph C. Staak, Lisa C. Heron. FCILB Licensing Course, August 20-21, 2015, Birmingham, AL. Joseph C. Staak, Lisa C. Heron. BIM 3 Course, AGC Georgia, October 7, 2015, Tifton, GA. Philip E. Beck. Georgia Lien Law, AGC Georgia, October 14, 2015, Atlanta, GA. S. Gregory Joy. BIM 3 Course, AGC Georgia, November 18, 2015, Atlanta, GA. Philip E. Beck. UPCOMING SEMINARS/WEBINARS Contact any of the listed SCH Lawyers for More Information This communication is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that the Internal Revenue Service may impose on the taxpayer. This newsletter is intended to be a source of general information on news or current topics on construction law, government contracts and commercial law. It is not intended to render legal advice on specific problems. In assessing specific problems, advice and counsel should be sought from experienced professionals. Address Change? To ensure you continue receiving our newsletter, e-mail your address changes to [email protected]. Comments or Suggestions If you have questions regarding a par- ticular topic or article, please note that we have included the contact informa- tion on the primary author(s) for each article. If you have general comments or suggestions for a topic, please con- tact the editor, Charles W. Surasky (Tele- phone (404) 582-8022 or via E-mail at [email protected]). Editor: Charles W. Surasky Associate Editor: Daniel M. Carrico Repercussions | All states prohibit the unlicensed practice of design professional services. Repercussions range from fines to misdemeanors to felonies. Moreover, in many states, unlicensed design professionals lose their right to sue for services performed and must refund any payments made for services performed. As such, it is in every design professional and design professional firm’s interest to verify current licenses, renew licenses promptly, or obtain a new license when performing or offering to perform services in a foreign jurisdiction. In addition, design professionals must pay attention to any changes in state licensing board rules or state statutes in all jurisdictions where they are licensed. Board rules and state statutes pertaining to design professionals, are available on each state licensing board’s website. Kathleen Hsu 202-735-2452 [email protected] Member of the State Bar of Virginia