The Foundation of Your Case: Current Issues in Tennessee Construction Law

Mon, Aug 5th, 2024 | by Miles Mediation and Arbitration | Article | Social Share

Construction law cases can involve a broad variety of issues, including breach of contract claims, construction delays, structural deficiencies/construction defect claims, environmental issues, and regulatory claims, among others. They often involve multiple parties and subcontractors, with claimed damages ranging from tens of thousands to tens of millions.

What kinds of issues are trending in Tennessee construction law right now? And what should construction lawyers be aware of when representing clients in these cases? Here’s a closer look at some issues for Tennessee construction attorneys to keep in mind.

Construction in Tennessee

There has been a lot of residential construction in Tennessee in the past several years. We had a big residential construction boom, which has slowed due to rising interest rates, but now we’re starting to see complaints of construction defects. These claims typically start to arise a year or two after construction, and these cases take a while to work their way through the courts. At the same time, with many residential construction cases, contracts—especially with subcontractors—are minimal to nonexistent, so there’s a lot of uncertainty regarding the scope of work or what it was supposed to be, or how change orders were supposed to be handled, for example.

We also have the Prompt Pay Act in Tennessee, and we’re starting to see more issues around that. [See “Statutory Considerations,” below.] Another issue is the Contractor Licensing Law, which provides that if the contractor does not have the proper license, the contractor is limited to recovering actual out-of-pocket expenses, including materials and labor. Furthermore, it is the burden of the contractor to prove the same by clear and convincing evidence. In one recent case I mediated, the contractor tried to divide the work into multiple contracts, each of which was below its contracting authority, but in aggregate, they were well above his authority. The chancery court ruled that it wasn’t allowed under the circumstances because it was clearly one project.

On the commercial construction side, there are many disputes, in part because of supply chain issues stemming from the pandemic. Often a commercial contract has a schedule, and there are disputes about whether a failure to meet a deadline was because of a problem with getting material or whether the failure was a material breach. We’re now seeing specific language in contracts to protect contractors—for example, if they have problems getting people to work (because of labor shortages) or getting supplies (because of supply chain issues), that type of incident isn’t to be considered a “material breach.”

Another consideration that is arising more frequently, especially with commercial construction contracts, is the inclusion of mandatory mediation and/or arbitration provisions. In the past, some contracts have provided for mandatory arbitration, but we’re seeing some pushback on this because arbitration, especially if a three-arbitrator panel is required, is so expensive. The trend for a long time was to get to arbitration instead of litigation, but arbitration can be more expensive under the right circumstances, so cost-conscious participants are revisiting that issue in contracts and starting to choose mediation instead.

Finally, a significant area of contention is ensuring that contracts have clear language regarding change orders and how they are handled. Awareness and understanding of how change orders are handled can help prevent problems down the line.

Challenges of Litigation and Mediation

One of the challenges of litigating construction cases is that the factual scenarios are often complex, with multiple parties involved. You may have subcontractors pointing fingers at each other—for example, I recently mediated a construction defect case where the roof was leaking. The roofing subcontractor claimed that the leak was the fault of the framing contractor; the framing subcontractor, in turn, blamed the roofing subcontractor. With cases like this, it’s difficult to separate the issues; often, many of the issues are interconnected, so it’s essential to have all the parties involved at trial or mediation to address them.

Multiple subcontractors usually mean that you may also have multiple insurance carriers involved. For example, a contractor’s insurance policy may have an exclusion for the contractor’s own work but cover the work of a subcontractor. When litigating these types of cases, it’s essential to confirm that all relevant insurance carriers have been notified and can participate in mediation or other settlement discussions.

Lately, I’ve been seeing more cooperation between the owner and the general contractor in terms of going after subcontractors and their insurance carriers and working to maximize the payout by subcontractors. In a recent case, the owner sued the general contractor, and the general contractor sued the subcontractors, but as we prepped for the mediation, the general contractor and owner were working closely together as a united front.

Statutory Considerations

If you’re representing a contractor, subcontractor, or any other party to a construction dispute, check with the state of Tennessee to see if the contractors have valid licenses. As I mentioned above, under TCA 62-6-101 et. sec., if the contractor does not have a valid license in the category they are working, or if the contract exceeds the person’s contracting authority, the contractor is limited to recovering actual provable material costs and expenses—no profit or overhead is allowed. Furthermore, the unlicensed contractor has the burden of proving this by clear and convincing evidence.

Note that two or more licensed contractors may combine into a joint venture and combine the amount of the license authority, so long as both are licensed in the applicable area and the total contract does not exceed the sum of their authority. However, as previously discussed, be cautious about trying to break down a contract into separate smaller contracts.

Construction attorneys should thoroughly review the provisions of the Prompt Pay Act, TCA 66-34-101 et. seq., which provides some direction beyond the common law in the payment of prime contractors, subcontractors (remote contractors), architects, and engineers. The act does not apply to home improvement contracts or construction of one to four single-family units. It also does not apply to contracts valued under $500,000.

The Act also regulates retainage issues and the timing of payments under the prime and remote contracts. TCA 66-34-103 provides that a construction contract can allow for the withholding of retainage not to exceed 5% of the contract. The owner shall release the retainage within 90 days after completion of the work or within 90 days after substantial completion. “Work completed” means the completion of the scope of the work and all terms and conditions covered under the contract. The prime contractor must then pay the remote contractors within 10 days after the receipt of the retainage from the owner; remote contractors must pay lower-tier contractors within 10 days after the remote receives the retainage.

The handling of the retainage is also controlled by the act. TCA 66-34-104 requires that for contracts for the improvement of real property, the retainage must be deposited into a separate interest-bearing escrow account. If the party fails to deposit the funds into the escrow account, the party shall pay the owner of the funds $300 per day for every day that the funds are not deposited as damages (this is not a fine). Furthermore, the party depositing the funds has an affirmative duty to provide the name of the financial institution, the account number, and the amount of the funds deposited to the owner of the funds. Note that most of the provisions of the Prompt Pay Act are not waivable; however, most of the provisions do not apply to governmental contracts.

Considering Mediation

All types of construction cases are often well-suited to mediation. If you do plan to mediate, prepare your client for what will happen at the mediation and make sure that your client has a realistic evaluation of the case and their exposure beforehand. In many construction mediations, it’s helpful to have an expert available to explain technical issues to the mediator. Finally, make sure you have all the relevant parties present at the mediation.

Because construction cases are often complex, mediation is a less expensive and more efficient alternative to litigation and arbitration. Mediating a case early on can save the parties money, as well as the time and stress of litigation. Exploring this option with your client early on is always a smart choice.

*Originally published in the Daily Report and reprinted with permission.

About Barry Howard

Barry Howard has been mediating cases since 2007 and has been a full-time mediator and arbitrator for the last four years. Barry has mediated personal injury, professional liability, medical malpractice, civil rights, employment disputes, construction defects and injury, wrongful death, and commercial disputes.