Two Wrongs Don’t Make a Right: Unlicensed Contractors Can Pursue Designers for NegligenceThe North Carolina Court of Appeals recently determined that a builder who fails to comply with state licensing requirements may still pursue a negligence claim against design professionals. In Wright Construction Services, Inc. v. The Hard Art Studio, PLLC, the owner contracted with architecture firm Olive Architecture to develop plans for a mixed-use complex in Raleigh, North Carolina. Olive, in turn, contracted with Collins Structural Consulting and Scott A. Collins (the “Collins defendants”) to provide structural engineering work.

The owner directed Olive to solicit bids for the project, and Wright Construction Services, Inc. submitted a bid for the work. In its initial call with the owner, Wright explained that it could timely complete the work but did not yet have a general contracting license. Despite Wright not having its license, the owner still engaged Wright as the general contractor. Wright obtained a North Carolina unlimited general contracting license a few months later.

The project ultimately experienced a host of delays stemming from problems with the drawings and “issues obtaining constructible designs.” The owner terminated Olive and hired the Hard Art Studio, PLLC. Once on the project, Hard “acknowledged numerous design issues that would prevent [Wright] from completing construction” and recommended that work stop until the design issues were resolved. The owner instead terminated Wright for failure to complete its work on time.

Wright brought suit against Hard, the Collins defendants, and other designers on the project (collectively the “defendants”) for breach of their professional duties of care as architects and engineers. The defendants argued that Wright’s claims were barred by Wright’s own failure to obtain the necessary general contracting license before bidding on the project in violation of N.C. Gen. Stat §§ 87-1 et seq. The defendant-designers contended that Wright’s failure to timely obtain a license barred its ability to pursue claims for negligent design services because “contracts entered into by unlicensed construction contractors, in violation [of [a] licensing statute], [are] unenforceable by [the unlicensed] contractor.”

Wright countered that its suit was not based on the parties’ contract; rather, it was based on the defendants’ professional negligence. Regardless of its failure to have the necessary license at the time of contracting, Wright argued that architects and engineers are still required to uphold their professional duty to provide constructible designs that will ensure the “parties who reasonably rely on their work, [including their peers and their clients,] will not be injured.” In other words, engineers and architects are expected to exercise due care because their clients and peers on a project rely on a designer’s knowledge and expertise, and a failure to exercise such care amounts to negligence regardless of a party’s licensure status.

On appeal, the court determined that two wrongs don’t make a right when it comes to both a contractor and a design professional compromising the integrity of a single construction project. The court pointed out that construction projects have multiple participants, each of whom owe differing responsibilities to each other and their clients. For example, when an engineer or architect fails to ensure that the “parties who reasonably rely on their work will not be injured,” they breach their duty and should be held responsible for damages stemming from their failed professional performance. Likewise, contractors have a responsibility to obtain the proper license before bidding a project to ensure they are authorized to perform the work. If a contractor doesn’t obtain the necessary license it, too, should be held responsible. But should Wright, who violated a statute meant to “protect the public from incompetent builders,” still be able to pursue claims against the defendants for their own violation of laws also meant to protect the public from negligent design work?

The court ultimately found that the “licensure defense” raised by the defendants did not apply to the negligence claims brought against them by Wright. Why? Because “[a]pplying the license defense to these types of . . . claims would undermine [the purpose of the defense itself] – it would shield architects and engineers from responsibility for their failures to exercise due care” all because the contractor similarly failed to comply with its own statutory duty to the public. In the end, the public gains nothing from barring these types of direct claims as between contractors and design professionals. The court did emphasize that its narrow decision only addressed claims brought by unlicensed contractors based on a designer’s negligence.

This case emphasizes three key takeaways for contractors and designers:

  1. Contractors should ensure they comply with state licensing laws before bidding a project.
  2. Designers should note when contractors performing work on their projects obtain the necessary licenses. It could be useful information down the road.
  3. In some states, a contractor’s failure to obtain a license does not bar it from bringing negligence claims against designers.

Designers and contractors alike should seek advice of counsel when deciding how to enforce their rights against each other. It could mean the difference between recovery and mutual reprimand.

Significant Buy American Amendments Are HereThe Federal Acquisition Regulation (FAR) Council recently issued a final rule that implements the requirements of the Maximizing Use of American-Made Goods, Products, and Materials Executive Order. As discussed below, the final rule – which largely adopts the proposed revisions set forth in the FAR Council’s September 14, 2020, proposed rule — contains important amendments concerning domestic component thresholds and domestic pricing preferences, as well as reintroduces the domestic content test for commercially available off-the-shelf (COTS) items as it relates to certain steel and iron products.

Domestic Content Cost Threshold Changes

The rule increases the domestic content requirement for iron and steel end products from 50% to 95%, meaning that at least 95% of the content (determined by the cost of the components) for end products or construction materials that consist wholly or predominantly of iron or steel (or a combination of both) must be mined, produced, or manufactured in the United States.

However, for everything else, the rule increases the domestic content requirement from 50% to 55% percent “of the cost of all components.”

Domestic Pricing Preference Changes

The final rule additionally expands pricing preferences for domestic end products and construction materials as follows:

  • Increases the current 6% price preference that large businesses receive to 20%
  • Increases the current 12% price preference that small businesses receive to 30%

The rule does not, however, impact the 50% price preference that both large and small businesses receive for using domestic end products on Department of Defense procurements.

Revival of Domestic Content Test for Certain COTS

The final rule partially restores the domestic content test for COTS items as it pertains to iron and steel products. The rule, however, continues to waive the domestic content test for iron and steel “fasteners,” which is defined as “a hardware device that mechanically joins or affixes two or more objects” and includes “nuts, bolts, pins, rivets, nails, clips, and screws.”

Conclusion

The final rule is effective on January 21, 2021, and applies to solicitations issued on or after February 22, 2021, and resultant contracts.

If you have any questions regarding this noteworthy development, please do not hesitate to contact Aron Beezley.

 

DOJ Recovered Over $3 Billion from False Claims Act Cases in FY 2019The Department of Justice (DOJ) recently announced that it obtained more than $2.2 billion in False Claims Act (FCA) settlements and judgments in the fiscal year ending September 29, 2020.

Notably, DOJ reports that “matters that involved the healthcare industry” again comprised the largest portion of these FCA recoveries, but that “procurement fraud” recoveries comprised the second largest category of recoveries for DOJ this past year — just as they did in fiscal year 2019.

Among the more notable procurement fraud recoveries from fiscal year 2020 that DOJ reports are:

  • Multiple “major federal contractors” agreed to pay over $57 million to resolve allegations that they submitted false claims to the U.S. Department of Energy by charging inflated labor hours and by billing for work not actually performed to construct and maintain the Hanford Waste Treatment Plant.
  • A federal contractor agreed to pay $27 million to resolve allegations that it fraudulently induced the Army and the U.S. Defense Logistics Agency (DLA) to award wartime contracts for food and trucks by falsely certifying compliance with United States sanctions against Iran. The agreement also resolved allegations that an associated company falsely represented construction progress on a warehouse to induce DLA to award the prime vendor contract to provide food to U.S. troops in Afghanistan.
  • A leading supplier of “high-yield steel” for naval submarines paid over $10 million to resolve allegations that it produced and sold substandard steel components for installation on U.S. Navy submarines. The government alleged that the company produced castings that failed lab tests and did not meet the Navy’s standards, and that its director of metallurgy falsified test results to hide the failures.
  • “[O]ne of the largest engineering firms in South Korea” paid $7.8 million to settle FCA claims arising out of an alleged fraudulent scheme to obtain a large U.S. Army construction contract in South Korea by paying millions of dollars to an Army contracting official through a purportedly fake Korean construction company. The company also entered into a plea agreement with the United States and paid over $60 million in criminal fines for the same alleged misconduct.

In light of DOJ’s recent FCA report, as well as DOJ’s recent announcement that its Procurement Collusion Strike Force “continues to grow and expand,” procurement fraud undoubtedly will continue to be a significant focus for DOJ in 2021.

If you have any questions about how your company can potentially prevent or resolve procurement fraud-related matters, please do not hesitate to contact Aron Beezley.