The Construction Advantage – Issue 7

In our seventh issue of The Construction Advantage, we provide you with new data on the construction industry and two new cases from Massachusetts on bidding and the economic loss doctrine. We hope that this newsletter has been helpful and informative to you so far in 2014. Please feel free to let any of us know if there are specific issues that you want us to cover in the future.

Reed Construction Data – Economy Improving Slowly but Surely
By Mike Bosse

Reed Construction Data reports that the economy continues to improve but challenges remain. Based upon recent construction data from Reed Construction, the industry’s economy continues to improve even though it remains sluggish and somewhat uneven. Year-to-date, seasonally adjusted spending was almost 9% higher than a year ago, total residential construction was 18% higher and new residential construction at 17.7% higher. Private construction spending was 13% higher than this time last year, however, public spending was down 1.3%.

Despite the economy adding jobs each month, the unemployment rate for construction nationally still remained at 8.6% in May, well above both New England and the country’s unemployment figures. As many in the construction industry know, though, there continues to be a shortage of skilled construction workers for available projects.

Reed Construction forecasts that the economy will continue to strengthen modestly and at a likely faster pace during the rest of 2014 and 2015. It predicts somewhat optimistically that there will be increased federal funding for more infrastructure projects, although well short of what is needed to repair the country’s outdated infrastructure, something that Bernstein Shur’s Construction Group have reported on in the past given ME’s poor scorecard for roads and bridges in ME. Nevertheless, total construction spending is forecasted to increase 9.3% in 2014 and 11.2% in 2015 with nonresidential, heavy engineering construction, and residential construction leading the way.

City of Quincy, Massachusetts Bidding Requirements Pre-empted by Federal Law
By David Ray

In a case just decided by the First Circuit Court of Appeals in Boston, the Court has concluded that a City of Quincy, Massachusetts ordinance requiring bidders on municipal projects in the city to engage in a specific type of apprentice training program violated the Federal Employment Retirement Income Security Act (ERISA). The Court held that because the required apprentice training program qualified as an employee welfare benefit plan, and mandated certain requirements in the apprentice program, it was preempted by ERISA.

In this case, the City of Quincy was soliciting bids for a construction project for the construction of a middle school. Bidders for the project had to certify compliance with what the city named the “Responsible Employer Ordinance” that demanded that bidders on municipal public works projects have a bona fide apprentice training program that was registered with the Massachusetts Department of Labor standards. A trade alliance and two of its members filed suit against the City of Quincy and the Associated Builders and Contractors, Inc. and the New England Regional Council of Carpenters also filed legal briefs in the action.

The Court concluded that if a state law merely exerted an indirect economic influence on an employee benefit plan but did not bind the plan administrators to particular choices, then ERISA likely would not preempt the state or municipal law. Conversely, if a statute mandated a particular employee benefit of structure, it is preempted by the federal ERISA laws. Here, the Court noted that the state labor standards imposed a number of stringent conditions on bidders for the project, including documentation of the program’s terms and conditions, the location of the apprentice activities, training and instruction, wage rates, record keeping, instructor qualifications, apprentice enrollment, reporting and termination, and a defined graduation rate. The Court said that it had “no difficulty concluding that the ordinance goes far beyond simply influencing ERISA apprentice training programs. It mandates an employee benefit structure and specifies how the structure must be administered.” Accordingly, the First Circuit Court of Appeals struck down the City of Quincy requirements for bidders on public municipal projects.

This case presents a good reminder that federal statute and state statutes can sometimes conflict with each other and there are circumstances under which the federal statute is drafted by Congress in such a way that it will effectively trump the state or municipal statutes that conflict with the federal law. It is wise to think about the possibility that this may be occurring if certain municipalities put more stringent requirements that may be covered by broader federal laws. Be sure to consult with counsel at bid time so these items can be uncovered early in the process. Also, municipalities may want to seek counsel’s advice if there is a possible preemption issue with a new ordinance.

The Economic Loss Doctrine Scaled Back in Massachusetts
By Asha Echeverria

In a case recently decided by the Massachusetts Supreme Court, the Court reaffirmed that the Economic Loss Rule applies to construction cases in Massachusetts. The trustees of the Market Gallery Condominiums in Lowell filed an action against Ayer Properties seeking damages for the negligent construction of elements of a condominium, including window frames, exterior brick masonry, and the roof of the building, that resulted in damages to both common areas of the condominium as well as individual residential units. The Superior Court concluded that the contractor was negligent, and that the condominium association was entitled to damages for everything but the brick masonry. On that issue, the Court held that the economic loss rule precluded the condominium trustees from recovering for damage to the defective masonry work, because the defective masonry work did not damage any other part of the condominium property.

The Massachusetts Supreme Court overruled the lower court and concluded that damages for the masonry work was appropriate as well. The Court restated the Economic Loss Rule, which states that in the absence of personal injury or physical damage to property beyond the defective product itself, the supplier of the defective product is not ordinarily liable on a negligence theory. Instead, the parties must look to contract remedies. Economic losses covered by the doctrine include damages for inadequate value, cost of repair, and replacement of the defective product, so long as there’s no claim of personal injury or damage to other property. The Court concluded that in a condominium context, the Economic Loss Doctrine does not apply to the negligent design and construction of common areas of a condominium. The Court explained that the particular nature of a condominium is a hybrid form of interest in real estate where an owner has exclusive ownership and possession of his or her individual unit, but an undivided interest in the common areas. The trustees of the condominium are the ones who have standing to bring the action against the builders for the common area damage, but did not have a direct contract with the builder and thus could not bring a contract claim in order to recover its economic losses caused by the defective construction. The Massachusetts Supreme Court concluded that in this particular circumstance, the purposes underlying the Economic Loss Rule would not be applicable and the association could proceed and recover damages on a negligence theory.

The economic loss rule has been applied in varying degrees in construction cases for over two decades now. However, the application of the rule, and its reach, differs from state to state, and under different factual scenarios. Do not assume that the economic loss rule automatically bars or does not bar a negligence action. As this case shows, depending on the particular facts, the answer may differ.

We hope that you have found these tips and pointers in the seventh issue of The Construction Advantage helpful to you in your daily business. Each of the attorneys in our Construction Law Practice is available to answer the day to day questions of your business as you work on projects over the summer months.