Massachusetts SJC Clarifies “Strict Compliance” Standard in Construction Contracts

By on November 27, 2018
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In Massachusetts, it is well established that a contractor cannot recover damages from a construction contract without first showing that the contractor completely and strictly performed on all of the contract’s terms. Recently, the Massachusetts Supreme Judicial Court narrowed the rule by concluding that complete and strict performance is only required for contract terms relating to the design and construction itself. The high Court explained that non-design / non-construction contract terms are governing by “ordinary contract principles, including the traditional Massachusetts materiality rule.”1

In the case – G4S Tech. LLC v. Mass. Tech. Park Corp. – G4S Tech. LLC (“G4S”) brought suit against Mass. Tech. Park Corp. (“MTPC”) alleging MTPC owed G4S $4 million of a $45 million contract after G4S completed the build of a fiber optic network in western and north central Massachusetts.2 MTPC maintained that they withheld the $4 million because of substantial delays in the project.3 MTPC in turn brought counterclaims against MTPC alleging fraud and violations of the Massachusetts Consumer Rights Act. Specifically, MTPC maintains that G4S fraudulently and intentionally delayed payments to subcontractors in violation of the construction contract.4 The SJC held that the contract provisions dealing with the “timing of payments to subcontractors and the documentation concerning those payments” is not a contractual term relating to the design or the construction of the fiber optic cable itself.5 Thus, the SJC analyzed the alleged violations under the Massachusetts materiality standard as opposed to the strict and complete performance standard.6 In general, a material contract breach (i.e., a breach concerning an essential and inducing feature of the contract) may discharge the non-breaching party from performing on the contract while a minor or ancillary non-material breach generally does not discharge the non-breaching party (but may warrant monetary damages). Here, the SJC decided that the fraudulent recording of subcontractor payment did constitute a material contract breach.

The SJC’s holding in G4S Tech. LLC v. Mass. Tech. Park Corp. is significant for future construction contracts because it shapes different standards and effects for different categories of contractual terms. That is, to the extent a contractual term relates to the design or construction itself, a contractor is required to strictly and completely comply with such terms. The Court reasoned that strict compliance is required to ensure that the “construction itself is done safely and correctly according to design specifications.”7 However, if a contractor fails to strictly comply with a non-design / non-construction term then a court must analyze whether the non-compliance constitutes a material breach or merely a non-material breach and the effect thereof.

Moving forward, Massachusetts contract drafters, contractors, and owners should pay close attention to terms relating directly to the design or construction of a particular project. Interestingly, the SJC chose not to consider the consequences of contract provisions “that are subsidiary to or supportive of the design and construction, but do not directly involve the design and construction itself.”8 As such, future litigants may attempt to argue that particular provisions are merely “supportive” to a project’s design and construction and thus doesn’t require strict compliance. That being said, best practices for contractors remains the same – strictly and fully comply with all terms.
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1 G4S Tech. LLC v. Mass. Tech. Park Corp., 479 Mass. 721, 723 (2018).
2 G4S Tech, LLC, 479 Mass at. 721.
3 Id.
4 Id. at 723.
5 Id. at 733.
6 Id. at 734-24.
7 Id. at 731.
8 Id. at 732.

Filed under Construction Contracts

Designed to Expose: Beware Lender Certificates

By on August 8, 2018

Danny the Developer wishes to build Greenacre, a large residential and retail condominium complex in downtown Boston. However, Danny’s lender – the Bank of Barbara – will not lend Danny the money to develop the complex unless Danny’s architect signs a lender certificate. Danny presents the lender certificate to Allie the Architect, the certificate is relatively short and simple, it states:

“Allie the Architect prepared plans and specifications relating to Greenacre. Allie the Architect certifies that the plans are in accordance with all applicable zoning, building, housing and other laws, ordinances, regulations including but not limited to the Federal Fair Housing Act, the Uniform Federal Accessibility Standards, and the Americans with Disability Act. The Plans do not encroach over, across or upon any such easements, rights-of-way, or subsurface rights and the like. Allie further certifies that the load bearing capacity of the soil is adequate to support the plans. The Bank of Barbara shall rely upon Allie the Architects certification in loaning money to Danny the Developer for Greenacre.”

Allie the Architect, visualizing the full-scale version of her brilliant design in the heart of Boston’s skyline, eagerly signs the affidavit. Three years later and about halfway through construction, soil movement causes severe cracking in Greenacre’s foundation. It becomes evident that soil conditions of the land are not capable of supporting the original foundation as designed and are not adequate for Greenacre’s long-term support. Repairing and rebuilding the foundation will increase the cost of the project 25% and delay Greenacre’s opening for an additional two-years. Danny the developer, unable to handle the unexpected costs and delayed opening, defaults on his loan with the Bank of Barbara. Subsequently, Danny the Developer and the Bank of Barbara sue Allie the Architect for breach of contract and breach of express warranty. Specifically, the parties allege that Allie the Architect falsely represented in the lender certificate that the soil was adequate to support Greenacre.

Allie the Architect is shocked by the lawsuit and doesn’t understand how she can be liable when she was merely involved in the design of the building itself. She is also shocked when she receives a “Reservation of Rights” letter from her E&O carrier saying that her policy only provides coverage for claims based on negligence, not claims such as those here that are based on breaches of express warranty. This ROR letter explains that if she is found liable for the Lender’s claims, she will be on her own – the insurer will not pay the judgment. When Allie consults a lawyer – something she should have done before signing the lender certificate – she confesses/complains: “I had no knowledge regarding the nuances of the land where Greenacre would rest, I had no involvement in the soil or geotechnical engineering, all information regarding the soil and land was provided to me by Danny the Developer. How is this happening?” The lawyer explains the lender certificate is the root of her liability. The certification Allie signed contained representations as to the soil condition as it existed. Despite having relied on what Danny the Developer told her, Allie opened herself up to liability by signing a document in which she certified/warranted/promised that the soil conditions were adequate to support her design.

Sadly, Allie’s situation is not unique. Many lending agents require design professional to execute certifications like the one described above. These certifications often include representations and warranties that open design professional to exposure and potential liability that would not have existed otherwise.

Essentially, lender certificates give the lender someone to sue if a project goes wrong. Lender certificates are usually proffered as a “mandatory pre-requisite” to a lender’s financing and such certificates offer little to no benefit to the design professional. By signing a lender certificate with such overbroad representation and warranties, a design professional risks becoming a scapegoat for many possible problems. By design, lender certificates create exposure and potential liability—precisely why many are drafted to include broad and overreaching language. Oftentimes lender certificates require a design professional to represent and warrant as to facts and services which are not within their personal knowledge, scope of service, or expertise. In the case of Allie the Architect, the lender certificate included language regarding the adequacy of soil conditions when Allie should not have made any representations based on her own knowledge and expertise.

What are some ways to help minimize risk for design professionals when reviewing and signing lender certificates? In the absence of not signing the certificate entirely (often not an option), design professionals should carefully review any representations and warranties (with their experienced construction lawyer) to ensure the certificate only includes facts that are known to him or her at the time of signing. Additionally, the language of the certificate should only extend to the scope of the design professionals’ services. Further, the design professional should identify any information provided to him or her by a third-party.

Often times design professionals feel as though they have no leverage when asked to sign a lender certificate. A design professional might think “If I do not sign, then the bank simply will not loan my client the money, the project won’t go forward and I won’t earn a fee.” Regardless of whether that is true, a design professional must determine if they feel comfortable taking on a great deal of risk so their client can secure financing. If a design professional feels compelled to sign then they should consider adding a provision to limit liability. For example, “It is understood and agreed that the information contained herein is for the client’s use, without any responsibility or liability of the architect to any lending institution who may rely on the said information in relation to lenders financing of the client’s project.” An indemnification provision can be used to shift liability away from the design professional and avoid future litigation. Another good antidote to an overbroad certificate is to revise the “certifying” language. Instead of saying that the design professional “warrants and certifies” the following facts, the certificate should be revised to state that the design professional “represents upon information and belief” the following facts. Despite any such provisions, the best practice is to have a lawyer review the lender certificate prior to signing as such certificates tend to be a trap for the innocent.

Filed under Design Professionals, Lender Certificates