Now You See It, Now You Don't: Road Side
| Publication year | 1993 |
| Pages | 15 |
| Citation | Vol. 6 No. 8 Pg. 15 |
Warnings to the Hocus Pocus World of Construction Management
Gregory M. Simonsen, J.
The words "construction manager" are appearing increasingly in contracts where the words "general contractor" previously appeared. The emergence of the construction manager as substitute for a general contractor, and to a lesser extent for design professionals, is a trend that raises numerous potential legal issues for lawyers representing property owners, liability insurers, title insurers, lenders, contractors, materialmen, governmental entities and others. These issues arise because most statutes, case decisions, form contracts, insurance policies, surety bonds, and other legal documents affecting the construction industry have been drafted contemplating the traditional tripartite construction system of architect, general contractor and subcontractor. Use of a construction manager changes the tripartite relationship and thereby alters duties and potential liabilities in the overall scheme of the construction project. Often these changes are subtle, not easily recognized, causing the parties to assume they are in one legal position, when in fact, they are in an entirely different position. The result can be expensive litigation with potentially disastrous and unexpected liability problems.
A recent case illustrates the point. The owner was a Fortune 500 corporation constructing a large hotel in Las Vegas. It hired a construction manager to oversee the project from design to completion. One of the primary duties of the construction manager was to bid various parts of the project to trade contractors. The bidding process was conducted in almost the exact manner that a general contractor bids out portions of a project to subcontractors. The construction manager performed most of the same supervisory duties that the general contractor traditionally performs. In fact, most of the trade contractors thought of themselves as subcontractors.
Several Utah trade contractors were awarded large contracts on the project. Nearly identical form contracts were sent to each. The first sentence of the contract recited that the agreement was between the construction manager and the trade contractor. Similarly, the agreement was signed by the construction manager and the trade contractor. However, the third paragraph of the contract stated that the construction man-ager was entering into the agreement as the agent of the owner.
The project proceeded smoothly and near completion the owner recorded a notice of substantial completion. Under Nevada law, the recording of a notice of substantial completion shortens the lien recording time from 90 days to 40 days if a copy of the notice is sent to general contractors. In this case the owner assumed I the construction manager was the de facto I general contractor and only sent a copy of the notice of substantial completion to the construction manager. Approximately 50 days after the recording of the notice of substantial completion, the owner sold the hotel. The buyer's mortgage company and title insurer did not concern themselves with potential mechanic's liens because more than 40 days had passed since the notice of substantial completion was recorded and no liens had been recorded. Unfortunately, during the 30 days after the sale, the seller declared bankruptcy and trade contractors recorded mechanic's liens in the aggregate sum of 1.3 million dollars.
In actions brought by the lien claimants to foreclose, the buyer, the trust deed beneficiary and the title insurer claimed the liens were not valid since they were recorded more than 40 days after the notice of substantial completion was recorded. The trade contractors, basically reading their contracts seriously for the first time, claimed to be general contractors in direct privity of contract with the owner. They argued that because they had not been mailed a copy of the notice of completion, the 90 day recording period was applicable, not the 40 day period. The buyer and its title insurer contended that the trade contractors were subcontractors, not entitled to notice since they performed all the functions traditionally performed by subcontractors. On a motion for summary judgment brought by the lien claimants, the court ruled the trade contractors were all general contractors, thereby concluding the liens were timely filed and superior in right and time to the trust deed recorded by the buyer's lender.
In this case the buyer, its title insurer and lender made the mistake of assuming that the usual tripartite system of architect, general contractor and subcontractor was in place. It is easy to see how this mistake was made. The construction manager looked, acted and supervised like a general contractor. The trade contractors looked, acted and even thought of...
To continue reading
Request your trial