By Attorney Edward Jesson
This week’s article deals with the responsibilities that contractors have with regards to the actual design of the building, which necessarily includes the building’s structural system. Generally, the contractor responsible for building the project, be it new construction or otherwise, is not responsible for the design aspects of the project unless we are talking about a design-build project. The design aspects will usually fall to a “design team,” often comprising of some combination of architects and engineers. Or, more often in the residential setting, the owner will provide plans and specifications to the contractor.
The following problem has come up time and time again: a general contractor finishes work on a project, built perfectly to the plans and specifications, only to find out that the plans and specifications were defective in some way, which has then caused issues with the final project (at the extreme end, these issues could be structural, rendering the completed project unfit for purpose). Invariably, on discovery that the project has some serious issues, the project’s owner will first turn to the general contractor to “fix it.” Of course, if “fixing it” involves starting from scratch, neither the owner nor the contractor wants to come out of pocket to pay for that.
Legally speaking, the courts throughout the United States have created a doctrine whereby the project owner impliedly warrants that the information, plans, and specifications that an owner provides to the general contractor are fit for purpose. In a residential setting, even if the owner used a design team, if the owner provided plans and specifications to the contractor, this doctrine would likely still apply. This doctrine is known as the Spearin Doctrine and arises from the case United States v. Spearin, which was argued in the United States Supreme Court in 1918.
What this essentially means is that, so long as the contractor complies with the plans and specifications supplied to it by the project owner, the contractor cannot be held legally responsible for structural defects if those plans and specifications are not adequate for the specific project. Contrast this, for example, with a design-build project, where the contractor or its consultants are partially responsible for the design aspect of the project, and you can see how Spearin would likely be inapplicable to those circumstances.
There are, of course, exceptions to this general rule. For example, if there is an express term contained in a contract that the contractor is responsible for any design defects, then it is likely that a contractor in that situation could be held legally responsible. Another exception is that of “reasonable reliance,” which means that if a design defect is so glaringly obvious that it could not be missed, a contractor would not then be able to later claim that they relied on the plans in order to avoid liability.
While generally not directly responsible for the design of structural systems (or, indeed, other areas of a project), that does not mean that a contractor cannot be held liable for deficiencies in the design. The best protection against issues such as the ones presented in this article are written contracts in place between all parties to a construction project, including the design team, and not just between the owner and general contractor.
By Attorney Kelly Rains Jesson
In addition to celebrating Christmas, Hanukkah, and Kwanzaa this month, December is National Write a Business Plan Month! The holidays are a time for reflection and a time to look forward to the future, and if you’re thinking of starting a business in 2020, you should consider spending some time during your holiday break writing a business plan. While a business plan is not a legal requirement for starting a business in North Carolina, there are some benefits:
Writing a business plan helps you figure out your ideal business structure. As we wrote here before, you have several choices of entity in North Carolina, and they each have their pros and cons.
Writing a business plan helps you attract investors, partners, and key employees because it helps them envision the future and it shows you are responsible, serious about the success of the business, and strategic. Some lenders will require a business plan before issuing a business loan.
Writing a business plan helps you create a budget by planning for expenses and estimating revenue.
Finally, you can include goals and milestones in your business plan and then celebrate when you reach them in 2021!
Everyone here at Jesson & Rains wishes you a Merry Christmas and a happy holiday!
By Attorney Edward Jesson
I am excited for the opportunity to speak to you each month about legal issues in the construction industry. My name is Edward Jesson, and I am a partner with the law firm Jesson & Rains, PLLC based in Charlotte, North Carolina. I grew up in England and moved to the United States in 2005 to attend college in South Carolina before moving to South Florida for law school. Our firm protects businesses and their owners, specifically those in construction and related industries. My wife and I previously practiced in South Florida prior to opening Jesson & Rains in the fall of 2015.
In keeping with the theme of this first issue of Building Savvy, I think it’s important to be aware of a specific contract provision that can save the profitability of many jobs: Differing Site Conditions.
Coming across an unexpected site condition is a fairly common risk in a construction project, especially for those involved in new construction or those involved in the grading industry. Put simply, “differing site conditions” are generally considered to be a condition that is discovered while performing work on a project that was not apparent, visible, or expected at the time the project was bid. The majority of times these differing site conditions would be ones that could not have easily been discovered if the contractor had engaged in a reasonable site inspection during the bidding/quoting process. A good example of a differing site condition that you might encounter throughout the country would be unanticipated ground water. You could also come across differing site conditions during remodels -- a historical renovation would be one such example -- such as something in the walls that wasn’t expected or couldn’t have been uncovered with a reasonable inspection of the property (i.e. without tearing into walls to see what you find—which a lot of homeowners probably wouldn’t be too happy with during the bidding process!).
This presents a problem in construction projects, especially those that are for a fixed price. If you quote a homeowner $500,000 for a new build, and then encounter a differing site condition, the costs of construction can skyrocket. Without the proper contractual provisions in place, the homeowner may not be willing to pay those increased costs, nor may they be legally required to. Issues can also arise as
differing site conditions will often involve a delay in the completion date of the project; something which owners, both residential and commercial alike, are often none too happy about.
One of the main purposes of contracts in the construction industry is to assign various risks to parties to that contract before the work begins. This can clearly be seen with differing site conditions clauses in contracts. The differing site conditions clause in AIA 201-2017 states:
If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions. The Architect will promptly investigate such conditions and, if the Architect determines that they differ materially and cause an increase or decrease in the Contractor’s cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and contractor in writing, stating the reasons. If either party disputes the Architect’s determination or recommendation, that party may proceed as provided in Article 15.
AIA agreements are often standard in the commercial construction industry, though much less used on the residential side of things. While that AIA clause is certainly more than you would need for most residential construction projects, it is illustrative of what a differing site conditions clause tries to do. If the contractor notifies the proper people promptly (in this case the owner and architect, but on the majority of projects it would likely just be the owner), the owner must adjust the contract price accordingly to reflect the extra work that will be done and, if necessary, adjust the time required for performing the contract.
Contractors would be wise to consider using a differing side condition clause in their contract. A simple differing site condition clause, in addition to a well written contract in general, can help protect against the unexpected and, more importantly, help a contractor protect its profit when such conditions are discovered.
By Associate Attorney Danielle Nodar
Thanksgiving is one of the best opportunities of the year to slow down before the rush of the holiday season and spend quality time with our loved ones. During this time of relaxation and reflection, many people also think about how to they want to plan for their future and the impact it may have on their loved ones. The holiday provides a chance to catch up with loved ones we may not see during the year and open the door to discussing important topics as a family.
While the majority of adults consider having an estate plan important, nearly half of all Americans do not have a will, and even fewer have other documents that plan for incapacity. Unfortunately, there are countless issues that could arise without proper estate planning.
Without a will or living trust, your assets would pass according to the intestacy laws of North Carolina. This takes away the control you have over who inherits what when you pass away and could have huge implications on your loved ones. Additionally, in North Carolina, a will is the only way to name a guardian for your minor children in the event that both parents pass away.
Furthermore, some people may require more complex estate planning depending on their family situation (such as second marriages, a child with special needs, or care of minor children) and the type and amount of their assets. Estate planning through devices such as living trusts allows you to put plans in place to address the specific needs of your beneficiaries, avoid the probate process, and address more complex tax issues depending on your assets.
Finally, a comprehensive estate plan not only plans for what happens after death, but also addresses who would be responsible for making decisions on your behalf if you became incapacitated during your lifetime. This includes naming someone to make financial decisions on your behalf and someone to make medical decisions on your behalf. Without such a plan, your family may have to go through more drastic and expensive court proceeding to have you deemed legally incompetent by a judge.
While most people think of turkey, football, shopping, and the inevitable food coma when Thanksgiving comes to mind, it’s an opportunity to discuss planning for the future while everyone is gathered together in the spirit of family and gratitude. If you approach the topic with honesty, care, and thoughtfulness, it could help you get the ball rolling on making important decisions for your estate plan that will have a positive impact on your family for years to come.
By Attorney Kelly Rains Jesson
Back in July of 2016, we wrote about the Department of Labor’s dramatic new proposed overtime rule, which frightened a lot of business owners. A few months later, a judge invalidated the law, and the 2004 law has been in place ever since.
The new law is back, but a little less dramatic.
Everyone is somewhat familiar with the law that requires overtime to be paid to employees who work over 40 hours per week. However, the law exempts any employee employed in a bona fide executive, administrative, or professional capacity. This exemption is premised on the belief that these types of salaried employees generally earn higher salaries and enjoy other benefits.
The change in the 2020 law applies to the exception to this exemption – if a person is a salaried employee and employed in an executive, administrative, or professional capacity, they will still be entitled to overtime under federal law if they earn a “low” salary. Currently, an employee in this category who earns less than $455/week or $23,660 is entitled to overtime if they work more than 40 hours per week.
Starting January 1, 2020, these figures will increase. If an employee in this category earns less than $684 per week (equivalent to $35,568 per year for a full-year worker), they will be entitled to overtime if they work over 40 hours per week.
If you are a business owner and employ employees who may be affected by the change in the new law, we encourage you to contact an attorney or other human resource professional to ensure you comply with the law. There are other changes in the overtime law that may affect you and your business. More information can be found here.
By Associate Attorney Danielle Nodar
When creating an estate plan, people oftentimes consider their legacy and what they may be leaving behind for future generations. For many individuals, this legacy extends beyond their loved ones and includes considering donations to a charity they have given time or money to during their lifetime, a school or organization that has had a meaningful impact on their life, or a cause that they are passionate in supporting.
There are many methods of including a charity in one’s estate plan. One is naming a charity as a beneficiary in your will or trust. Just like any other asset that is left to an individual beneficiary, the terms of your will or trust designate how and when your assets are distributed for charitable purposes and your executor or trustee will be responsible for carrying out the distribution. When considering what to give to a charitable organization (often referred to as Section 501(c)(3) tax exempt organizations), it is important to remember that your gift can go beyond cash in a bank account, but can include assets like a stock portfolio, artwork, a car, or real estate.
When deciding how to contribute to a charity, an estate plan may also provide you with more options in determining how the donation is used. For example, if your donation is to a charity that fights a certain disease, your estate plan can specify that you want your donation to be used for research. You can also leave the donation to the charity directly and they make the overall decision as to how the funds are allocated.
In addition to the benefits to the charity, there may also be financial benefits to your estate and loved ones by including charitable giving in your estate plan. Gifts, during life or at death, to Section 501(c)(3) charities do not count towards the total taxable value of your estate. Thus, naming a charity as a beneficiary will reduce the value of your estate at the time of death, which can lower or eliminate the amount of estate taxes owed by your estate.
Depending on the size of the donation you are planning to make, you may also be able to create a donor advised fund (DAF), which allows you to make irrevocable charitable gifts to Section 501(c)(3) charities while taking advantage of tax benefits during your lifetime. With a DAF, most donors are immediately eligible for a tax deduction upon making the initial donation, donor contributions to the DAF are tax-deductible, and investment growth in the DAF is tax-free. You can also donate long-term appreciated securities without paying capital gains tax.
Another way to include charitable giving in your estate plan is through updating beneficiary designations of life insurance policies, annuities, IRAs, or other retirement plans. You can name a charity as a primary or contingent beneficiary and gift them all or a portion of the funds. While this option may be as simple as updating a beneficiary designation, whether or not is the best choice for charitable giving depends on a variety of factors, including what other assets an individual may have at the time of their death and the value of the asset being distributed through a beneficiary designation. For example, using charitable giving through retirement accounts may be a wise choice for some individuals as retirement accounts are some of the highest taxed assets in any estate. By gifting your retirement account, your estate tax burden is reduced because your estate will receive a federal estate tax charitable deduction on the value that is held in the account. Furthermore, the charity does not have to pay income taxes on this gift.
When considering your priorities in your estate planning, dedicating a portion of your assets to charitable giving is one of the ways to support causes that are important to you, even after death. Contact Jesson & Rains for assistance with considering your options for charitable giving in your estate plan.
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