INDIANA STATE BAR ASSOCIATION BIG 10 CONSTRUCTION & SURETY LAW CLE CONSTRUCTION CONTRACTING WITHOUT BORDERS MARCH 10-11, 2016

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1 INDIANA STATE BAR ASSOCIATION BIG 10 CONSTRUCTION & SURETY LAW CLE CONSTRUCTION CONTRACTING WITHOUT BORDERS MARCH 10-11, 2016 WISCONSIN CONSTRUCTION LAW OVERVIEW Brian R. Zimmerman Hurtado Zimmerman SC I. TREATMENT OF GENERAL CAUSES OF ACTION a. Negligence; Economic Loss Doctrine: To succeed on a negligence theory based on construction defects, a claimant must ordinarily show more than mere economic losses, and damage to property (other than the work itself) or personal injuries. Linden v. Cascade Stone Co., 2005 WI 113, ^6, 283 Wis. 2d 606, 613, 699 N.W.2d 189, 192 (2005). Economic losses are those damages arising because a product did not perform as expected, and include damages to repair the product itself or monetary losses caused by the product, such as loss of use or downtime. Id. Construction projects are generally treated as contracts for a finished "product," the home, condominium, or completed structure. See Linden, 2005 WI 113 at ^25, 283 Wis. 2d at 622, 699 N.W.2d at 197 (construction of custom design-built home, was for a product, the home); 1325 North Van Buren, LLC v. T-3 Group, Ltd., 2006 WI 94, ^50, 293 Wis. 2d 410, 439, 716 N.W.2d 822, 836 (construction management contract for renovation of an existing warehouse into a condominium building, was for a product, the condominium complex). In order to determine whether a contract is for a "product" to which the economic loss doctrine applies, Wisconsin has adopted a predominant purpose test, which weighs whether the contract is predominantly for services excluded from the economic loss doctrine, or one for a final product, such as a house. Id. at ^42, 435, 834. Generally, a design- build contract, whether residential or commercial, even though design services are rendered will be treated as a contract for a product, and subject to the economic loss doctrine. i. Exceptions to the economic loss doctrine: 1. Service contracts such as architectural or engineering contracts where the predominant purpose is the provision of professional services; 2. Fraud in the inducement of the contract, when the fraud in question is "extraneous," but must be "interwoven" into the contract. See Kaloti Enters., Inc. v. Kellogg Sales Co., 2005 WI 111, 283 Wis. 2d 555, 699 N.W.2d 205. ii. Negligence Damages: 1. Generally. The cost to compensate for damages caused by negligence.

2 b. Breach of Contract: 2. Comparative Negligence. The liability of each person found to be causally negligent whose percentage of causal negligence is less than 51% is limited to the percentage of the total causal negligence attributed to that person. A person found to be causally negligent whose percentage of causal negligence is 51% or more shall be jointly and severally liable for the damages allowed. See Wis. Stat (1). Breach of contract actions are generally found when a party breaches a duty under the contract. Failing to perform a duty under the contract includes defective performance. Strict performance, however, is not required, and where a party has substantially performed (even though every detail is not in strict compliance with the terms of the contract) some measure of non-performance will be tolerated. Plante v. Jacobs, 10 Wis. 2d 567, 571, 103 N.W.2d 296, 298 (1960). Where there is substantial performance, a non-breaching party may still be able to recover damages caused by any defectively performed work. See Wis. JI-Civil 3052, Breach of contract actions are available for construction defects to the extent that construction fails to meet requirements of plans and specifications, if incorporated into the contract. Actions on projects without specific plans/specifications and design-build contracts for construction defects discovered following final completion may be precluded in the absence of express warranty provisions. Some case law suggests that a standard of performance of "good and workmanship-like manner" is inferred in contracts for construction work, but no direct case law has held a cause of action can rest on poor workmanship alone, in the absence of an express warranty. See generally Colton v. Foulkes, 259 Wis. 142, 144, 47 N.W.2d 901, 902 (1951). i. Freedom of Contract. ii. Warranty 1. Except for limited exceptions against public policy or identified in statute, most contract terms will be enforced, even where there may be unequal bargaining positions, such as between prime contractors and subcontractors. 1. No Statutory Warranty: There is no statutorily mandated warranty period for either residential or commercial construction. Common practice is a 1-year repair period as provided in the standard AIA A201 General Conditions. 2. Express Warranty: Created when a seller makes an affirmation of a material fact or direct representation of a fact to induce the sale and it is relied upon by the buyer. In construction, express warranties are generally specified in the contract and provide for repairs by a

3 contractor within a given time period. In conjunction with the limitations of the economic loss doctrine, the express warranty may provide a sole avenue for recovery on a construction defect claim, particularly with design-build construction, where the contractor is supplying an end product and does not have express contractual obligations to construct per plans and specifications supplied by the owner's architect. 3. UCC Warranties: May apply if the UCC is applicable to the transaction. a. Implied Warranty of Merchantability/Trade Usage (Wis. Stat ) i. Warranty that the good shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. b. Implied Warranty of Fitness for Particular Purpose (Wis. Stat ) i. Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is an implied warranty that the goods shall be fit for such purpose. c. Exclusion or Modification of Warranties (Wis. Stat ) iii. Damages for Breach of Contract/Warranty: i. Implied warranties of merchantability and fitness may be waived if such waiver is in writing and conspicuous. It is sufficient to state "There are no warranties which extend beyond the description on the face hereof." 1. Compensatory Damages. A person damaged by a breach of contract shall be fairly and reasonably compensated for all losses that are the natural and probable result of the breach. Wis. Jl-Civil a. Building Contracts: A damaged party is entitled to have what he or she contracts for or its equivalent. DeSombre v. Bickel, 18 Wis. 2d 390, 398, 118 N.W. 868, 872 (1963). Generally the measure of damages for construction defects is the cost of correcting the defects. See W.G. Slugg Seed and Fertilizer, Inc. v. Paulsen Lumber, Inc., 62 Wis. 2d 220, 223, 214 N.W.2d 413, 415

4 (1974) b. Economic Waste Doctrine - cost of repair vs. diminished value 2. Consequential Damages i. When repair would involve unreasonable destruction of the work done and unreasonable economic waste, a party is entitled to recover the costs of repair so far as can be done without economic waste and any remaining diminished value for defects that cannot be repaired without economic waste. W.G. Slugg Seed and Fertilizer, Inc., 62 Wis. 2d at 222, 214 N.W.2d at 415. For an example where a house was constructed with a wall misplaced, thereby narrowing the living room in excess of one foot, the recoverable loss was not the cost of tearing down the wall and rebuilding it according to the original design, but the diminished value of the house by reason of the departure from the design. See Plante, 10 Wis. 2d at , 103 N.W.2d at 299. a. Damages may be awarded in such sum as will compensate the injured party for expenses reasonably incurred, including foreseeable consequential, incidental, or lost profit damages. See Wis Jl-Civil 3710, 3720, b. There is no prohibition on the waiver of consequential damages. II. WISCONSIN TREATMENT OF COMMON CONTRACT CLAUSES a. Indemnity Indemnification clauses are permitted including broad form indemnification clauses covering the indemnitee's negligence. Indemnification clauses are, however, strictly construed and a clause indemnifying an indemnitee against his or her own negligence must be contained in an express provision. Note that under Wis. Stat , agreements to limit or eliminate tort liability as part of a contract for construction, alteration, repair or maintenance of a building or other construction work, are against public policy and are void. Nevertheless, this statute has been held to not affect indemnity clauses in contract. Implied indemnity is generally not recognized in Wisconsin, however, a party may maintain a claim for contribution against a joint tortfeasor for losses caused by others such as lower tier subcontractor. Generally legal defense costs are not recoverable on claims for contribution. b. No Damage for Delay General Rule. No Damage for Delay Clauses are generally enforceable. Delay "not contemplated by

5 the parties" is not exception to general rule that "no damage for delay" clauses of contracts are enforceable. John E. Gregory & Son, Inc. v. A. Guenther & Sons Co., 147 Wis. 2d 298, 305, 432 N.W.2d 584, 587 (1988). Exceptions. Fraud, bad faith, and unnecessary orders which are the result of inexcusable ignorance or incompetence. See John E. Gregory & Son, Inc., 147 Wis. 2d at , 432 N.W.2d at 586; First Sav. & Trust Co. v. Milwaukee Cty., 158 Wis. 207, 148 N.W. 22, opinion modified on denial of reh'g, 158 Wis. 207, 148 N.W (1914) c. Changes/Notice of Claim An express requirement in a contract for changes approved in advance, or for timing of notice of claim, may be subject to waiver by course of conduct of the parties. See Godfrey Co. v. Crawford, 23 Wis.2d 44, 126 N.W.2d 495 (1964); Christensen v. Equity Coop. Livestock Sales Ass'n, 134 Wis.2d 300, 396 N.W.2d 762 (Ct. App. 1986). d. Forum Selection/Choice of Law Clauses Void Forum selection clauses requiring litigation/arbitration in another state, and choice of law provisions naming another state's laws, are void in contracts for "improvement of land" located in Wisconsin. Wis. Stat (2); see also McCloud Constr., Inc. v. Home Depot USA, Inc., 149 F. Supp. 2d 695, 701 (E.D. Wis. 2001). e. Pay IF Paid Clause Void - Pay WHEN Paid Clauses Allowed. "Provisions making a payment to a prime contractor from any person who does not have a contractual agreement with the subcontractor, supplier, or service provider a condition precedent to a prime contractor's payment to a subcontractor, supplier or service provider [are void]. This subsection does not prohibit contract provisions that may delay a payment to a subcontractor until the prime contractor receives payment from any person who does not have a contractual agreement with the subcontractor, suppler or service provider." Wis. Stat (3) (emphasis added). Even when payment is delayed until after receipt from the owner, payment by the general contractor to a subcontractor will become due after a reasonable period of time after the general contractor was to have received payment. f. Waiver of Lien Before Payment Contract provisions cannot require subcontractor or supplier to waive lien or bond rights prior to payment, and are void. Wis. Stat (1). If subcontractor signs a contract requiring a lien waiver prior to payment, that clause is void, and the subcontractor can refuse to supply lien waiver until paid. See Tri-State Mech., Inc. V. Northland Coll., 2004 WI App 100, ^9, 273 Wi.2d 471, 478, 681 N.W.2d 302, 305. g. Contingent Lien Waivers i. Validity/Enforcement is in Question 1. Contingent lien waivers are signed at the risk of contractor. Lien waivers made expressly contingent on payment, may be construed as a waiver,

6 whether or not payment is made under Wis. Stat (1). Although lien waivers are construed under contract principles, no precedential case law decision has determined whether a waiver made expressly contingent upon payment will be enforced. "Any document signed by a lien claimant or potential claimant and purporting to be a waiver of construction lien rights under this subchapter, is valid and binding as a waiver whether or not consideration was paid threfor and whether the document was signed before or after the labor, services, materials, plans or specifications were performed, furnished, or procured, or contracted for. Any ambiguity in such document shall be construed against the person signing it. Any waiver shall be deemed to waive all lien rights of the signor for all labor, services, materials, plans, or specifications performed, furnished, or procured, or to be performed, furnished or procured, by the claimant at any time for the improvement to which the waiver relates, except to the extent that the document specifically and expressly limits the waiver to apply to a particular portion of such labor, services, materials, plans or specifications. A lien claimant or potential lien claimant of whom a waiver is requested is entitled to refuse to furnish a waiver unless paid in full for the labor, services, materials, plans, or specifications to which the waiver relates. A waiver furnished is a waiver of lien rights only, and not of any contract rights of the claimant otherwise existing." Wis. Stat (1): III. STATUTES OF LIMITATIONS a. Tort i. Personal Injuries: 3 years from date of injury. Wis. Stat ii. Property Damage: 1. Action not founded on contract to recover for damages for an injury to real or personal property: 6 years after the cause of action accrues. Wis. Stat (1). 2. Action not founded on contract to recover damages for an injury or to real or personal property that are caused or sustained by, or that arise from, an accident involving a motor vehicle: 3 years after the cause of action accrues. Wis. Stat (2). b. Contract Breach: 6 year after the action accrues. Wis. Stat c. Statute of Repose for Construction Claims: 10 years from Date of Substantial Completion. Wis. Stat (2).

7 IV. LIENS - Wis. Chapter 779 a. Who has lien rights? 1. If t damages first sustained within the 8 th -10 th year, the period is extended for 3 years from the date which damages first occurred. Wis. Stat (3)(b). 2. Exceptions: Fraud, misrepresentation, express warranty for the period of the warranty, negligence in maintenance or operation or inspection of an improvement to real property. Wis. Stat (4). i. Anyone who performs or furnishes any work, labor, service, materials, plans or specifications, used or consumed for the improvement of land on private projects. Wis. Stat (3). Definition of improvement is very broad and includes almost all types of construction work, supplies, and architectural work. Wis. Stat (2)(a). ii. Contractors, Suppliers, Architects, Engineering, Consultants, and Laborers of ANY tier, have a right to a lien. Wis. Stat (3). iii. Lien rights commence only after "first visible commencement" of the project, and work performed prior to first visible commencement is not subject to a lien unless the project advances past first visible commencement. Wis. Stat (4). b. Lien Priority i. Super priority is given to mortgage liens of most national banks, state banks, and mortgage bankers, regardless of time of filing. See Wis. Stat (4). ii. All contractors and material suppliers share the same priority, which relates back to the time of first visible commencement of the project. If there is inadequate value to cover all lien claims, claimants will be provided a pro-rata share of all proceeds based upon the total amount of their lien claim. See Wis. Stat (4). c. Filing Process Private Projects i. Residential Projects. Projects containing four family units or less and no commercial component require an "identification notice", in addition to the requirements of the Commercial lien process. Wis. Stat (2). 1. Prime Contractors: Identification notice must be included in the written contract, or if no written contract, then served on the owner within 10 days after first labor, services, materials, plans, or specifications are

8 provided. Identification notice must be at least 8- point bold type if printed, or in capital letters, if typewritten. a. Identification notice must be substantially in conformance with following: "As required by the Wisconsin construction lien law, claimant hereby notifies owner that persons or companies performing, furnishing, or procuring labor, services, materials, plans, or specifications for the construction on owner's land may have lien rights on owner's land and buildings if not paid. Those entitled to lien rights, in addition to the undersigned claimant, are those who contract directly with the owner or those who give the owner notice within 60 days after they first perform, furnish, or procure labor, services, materials, plans or specifications for the construction. Accordingly, owner probably will receive notices from those who perform, furnish, or procure labor, services, materials, plans, or specifications for the construction, and should give a copy of each notice received to the mortgage lender, if any. Claimant agrees to cooperate with the owner and the owner's lender, if any, to see that all potential lien claimants are duly paid". Wis. Stat (2)(a). 2. Other Contractors. Anyone other than a prime contractor must serve two copies of Identification Notice on the owner: a. Identification Notice must be substantially in conformance with following: "As a part of your construction contract, your prime contractor or claimant has already advised you that those who perform, furnish, or procure labor, services, materials, plans, or specifications for the work will be notifying you. The undersigned first performed, furnished, or procured labor, services, materials, plans, or specifications on... (give date) for the improvement now under construction on your real estate at... (give legal description, street address or other clear description). Please give your mortgage lender the extra copy of this notice within 10 days after you receive this, so your lender, too, will know that the undersigned is included in the job." Wis. Stat (2)(b). ii. Commercial Projects (more than 4 family units or any part is nonresidential) 1. Two Step Notice Process: a. Notice of Intention to File Claim for Lien. Wis. Stat (2).

9 i. Must be served on owner at least 30 days before filing a Claim for Lien 1. Service allows for delivery by registered mail, hand deliver, process server, or any other means where recipient provides written confirmation of delivery. Wis. Stat (2)(e). ii. Basic requirements: Brief description of the nature of the claim, the amount, and the land and improvements. b. File Claim for Lien. Wis. Stat (1). iii. Foreclosure Deadline 2 Years i. Must be filed with the County Clerk of Court within 6 months of the claimants' last day of work/materials for the project ii. Must be filed at least 30 days after Notice of Intention was served on the Owner. 1. Presents possible trap if deadline falls on weekend when clerk's office is not open or for shorter months such as February. iii. Content: Amount, statement of the contract that claim is founded upon, name of the owner, name of the claimant, last date of work, legal description of property, and all material facts related to the claim. Must be signed by claimant or attorney. Wis. Stat (3). iv. Copy of lien must be served on Owner within 30 days of filing. Wis. Stat (1). 1. Foreclosure of Lien must be filed within 2 years of date of filing or lien is void. Wis. Stat (1). d. Theft by Contractor/Contractor Trust Fund (Wis. Stat (5)) i. Money paid to a contractor or subcontract, by an owner or mortgagor, are deemed "trust funds" in the amount of all claims due, or to become due, for the improvements, until all the claims have been paid. Trust funds are not subject to attachment, garnishment, or other action until all claims have been paid.

10 ii. A contractor's use of project funds for any other purpose before all claims are paid on the project is deemed a crime of theft under Wis. Stat iii. Theft will be imputed to any officer, director, member, partner, or agent responsible for the misappropriation. iv. Misappropriated money received as salary, dividend, loan repayment, and capital distribution or otherwise, by any shareholder, member or partner not responsible for the misappropriation shall be a civil liability of that person. v. Civil Cause of Action allows for personal liability and treble (3x) damage award, plus attorney fees where there is intent to defraud. Tri-Tech Corp. of Am. v. Americomp Servs. Inc., 2002 WI 88, ^24, 254 Wis. 2d 418, 430, 646 N.W.2d 822, 828. V. COMMERCIAL GENERAL LIABILITY a. Generally it is necessary to show property damage to other than the work itself, triggered by an occurrence. i. "Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful condition." An accident within the meaning of the policy may be caused by faulty workmanship, although not all faulty workmanship will be considered an accident. Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 2004 WI 2, 15, 268 Wis. 2d 16, 673 N.W.2d 65, 70. ii. Insurance policy interpretation follows a three-step process: (1) the court examines facts of the insured's claim to determine whether the policy's insuring agreement makes an initial grant of coverage; (2) if the claim triggers the initial grant of coverage in the insuring agreement, the court examines the various exclusions to see whether any of them preclude coverage of the claim; (3) if an exclusion applies, the court determines whether any exception to that exclusion reinstates coverage. Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 2004 WI 2, ^24, 268 Wis. 2d 16, 32, 673 N.W.2d 65, 73.