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									                                     AGC Legal Brief
                                                                       Published by the AGC of Michigan
                                                                                               Volume V, Issue 2 - 2009

                                              LICENSING ALERT: Residential Licensing Requirements
                                                               after Pagel & Frey
                                                      by Stephen A. Hilger

                                     The unreported decision by the Michigan Court of Appeals in 84 Lumber v Pagel &
                                     Frey, Docket No. 271310, dated April 26, 2007 has sent a rippling chill throughout
INSIDE THIS ISSUE:                   the contracting community, forcing many contractors to wonder if they could suffer
                                     the same fate.
LICENSING ALERT:                     Pagel & Frey entered into a standard AIA Construction Management agreement
                                     with an Owner, to build expensive, high-end condominium units. Each unit sold for

Residential Licensing  
                                     between $1.5 and 2.5 million dollars. Each condo unit was intended to be sold by
Requirements after Pagel & Frey  
                                     the developer for residential use.
Limiting Designer Liability under    Before the contract was entered into, the Owner approached Pagel & Frey about
                                     building the Project, and made specific inquiry on whether Pagel & Frey held a
                                     residential builder's license. Pagel & Frey repeatedly assured the Owner that they
                                     held the license, a fact which later turned out not to be true. Further, Pagel & Frey
Enforcing Indemnity Agreements       treated this Project as if they were building a simple commercial warehouse. The
after Zahn                           complexities of the Project mandated much more attention. When Pagel & Frey did
                                     not give the Project the attention it needed, subcontractors did not perform timely,
“Common Work Areas” after            did not perform correctly, used improper materials, failed to build the units with the
                                     desired uniformity, and generally provided an unacceptable product. All of the
                                     ramifications of the case, and the financial result, could have been avoided with
                                     some attention to detail and a commitment to the Project which was lacking. This
                                     is one of the most important "lessons learned" which you will not be able to read
These articles were submitted by: 
                                     about in the Court's opinion.
        Stephen A. Hilger, PC        When the performance dispute began, and the Owner started complaining about
        49 Monroe Center  NW         how Pagel & Frey was running the job, or not running the job, the Owner started
                Suite 202            holding money back until the performance levels would become satisfactory. When
                                     they never did, one of the suppliers, 84 Lumber, brought suit on the construction
     Grand Rapids, Michigan 49503 
                                     account against Pagel & Frey. Pagel & Frey then recorded a construction lien
           Tele  616.458.3600        against the Owner’s property in the approximate amount of $360,000, and brought
           Cell  616.498.0855        a Third-Party action against the Owner to foreclose its construction lien under the
          Fax  1.888.863.7360        Michigan Construction Lien Act, MCLA 570.1101, et seq.
        Direct line 616.458.3601     The Owner filed a Motion for Summary Disposition at the outset of the case arguing       essentially two points; first, that the lack of a residential builder's license meant that
                                     the contract between the Owner and Pagel & Frey was not voidable, but void, and
                                     second, that the failure to have a residential builder's license meant that Pagel &
                                     Frey could not recover on their lien because of the failure to comply with the
                                     licensing requirements under both the Construction Lien Act as well as the Michigan
                                     Occupational Code. The case was argued before the trial court, and the Judge
                                     agreed under the first part of the motion that under the Michigan Supreme Court's
                                     decision in Stokes v Millen Roofing Company, the contract could never be enforced
                                     because Pagel & Frey lacked the licensing.
                                     To understand this portion of the decision, you need to know a little bit about Stokes
                                     v Millen Roofing Company. This is of particular interest to me because this Project
                                     was right down the street from where I lived at the time. Stokes took a very large
                                     house on Reeds Lake in East Grand Rapids, picked the entire house up, tripled the
                                     size of the foundation, set the house back down, and converted a beautiful home into
                                     a monstrosity. Stokes never paid his roofer. The roofer installed a slate roof and did
                                     a beautiful job. His only fault; he was from another state and was not familiar with the
                                     licensing requirements under Michigan law. The Michigan Supreme Court ultimately
                                     concluded that because Millen was not licensed as a residential builder, his contract
                                     was void, and he was not able to recover on his contract or his lien. Millen was a
                                     contractor who did a nice job and went home empty handed.
           Licensing Alert: Residential Licensing Requirements after Pagel & Frey (continued)

The trial court in Pagel & Frey read the Stokes decision and concluded that the contract with the Owner could not be
enforced for the lack of a residential builder's license. Pagel & Frey did not appeal that portion of the Trial Court's
The trial court came to the opposite conclusion on the lien. For separate reasons, the Trial Court concluded that this
Project did not meet the definition of a "residential structure" under the Construction Lien Act and therefore denied
summary disposition on the remainder of the case. This left the case in a very awkward posture; to foreclose on a
construction lien, you need a contract. Here, the court found the contract to be void, so in theory, there was no contract
to enforce.
The Owner then took the case up on appeal. Since the contract issues were not appealed, the Court of Appeals never
had to deal with the issue of whether the contract was "void" as would be suggested by the Stokes Court.
The Appeals Court reversed the trial court and sent Pagel & Frey packing. Some say this was a harsh result, and I
disagree for the fact-specific reasons of this particular case which are not readily apparent from either opinion. Pagel
& Frey could have avoided the entire outcome by accurately representing their licensing status and by spending more
time on the job managing this intricate Project. That is lesson learned number two.
Lesson learned number three comes from the text of the opinion. Under the Construction Lien Act, there are definitions
of "residential structures" which are not well defined, and a contractor may be able to escape non-payment under those
definitions or lack thereof. Not so as it relates to the Occupational Code. Under the Occupational Code, contractors
would be well advised to obtain the residential builder's license, and prominently place that license number on all their
contracts for any project that has any residential component to it. So, if you are building a mixed use facility under one
contract, and only a small portion of the project is residential, either in condominiums or apartments, you would be well
advised to have the license, and more importantly, have the license in the name of the company doing the work on that
Project. Otherwise, the contract may be declared void and you may not be paid in full.
What is worse, and what was not tested in the Pagel & Frey decision, is that if the contract turns out to be void, as
opposed to voidable, which is the way the Courts are going with this, besides not getting paid in full, you may have to
"disgorge" payments that you have already received, i.e.; pay back the Owner for everything that you have been paid.
Needless to say, that would be a disaster and should be incentive enough to get the license.

                                     Limiting Designer Liability under Keller
                                   by Stephen A. Hilger

The Michigan Court of Appeals, in what is called the “Keller” decision, has radically altered the playing field in the
relationship between design professionals and contractors on traditional design/bid/build projects. (Keller Construction,
Inc. v U.P. Engineers & Architects, Inc., unpublished, Docket No. 275379, July 8, 2008) The Supreme Court recently
declined the invitation to visit the issue.
To understand the significance, you need to know about three cases; the “Fultz” case, Fultz v Union-Commerce Assoc.,
470 Mich. 460 (2004), the “Bacco” case, Bacco Construction Co. v American Colloid Co., 148 Mich. App. 397 (1986)
and the “National Sand” case, Nat’l Sand, Inc. v Nagel Construction, Inc., 182 Mich. App. 327 (1990).
Keller sued a design firm alleging malpractice, negligence and tortuous interference with a business relationship; all
torts. From information available on the internet, it seems Keller had every right to sue. The project was a water
treatment plant in the UP, and from the allegations, the design firm engaged in conduct which the law, to put it mildly,
frowns upon. The earliest of the cases, Bacco, would have afforded Keller some relief because that court concluded that
foreseeable damages to a third person caused by an engineer on a construction project are recoverable for the
designer’s negligent performance of its contract. The National Sand decision likewise held that a plaintiff may maintain
an action in tort where he or she is injured by the negligent performance of a contract, even while not being a party to the
contract. Then, along comes the Fultz decision from the Michigan Supreme Court. This decision, however, is a premises
liability case involving snow plowing; not a construction case. Fultz stands for the position that a duty must be owed,
separate and independent from what is owed under the designer’s contract.
The Keller court applied Fultz to its case, over-ruled Bacco and National Sand, and concluded that for a contractor, or
presumably anyone else on a construction project who did not have a contract with a designer, to sue the designer, there
would have to be allegations of a tort which involved a duty that was different from the duty owed by the designer under
the contract for the project. This amounts to an enormous shift in responsibility on a construction project.

                                     Enforcing Indemnity Agreements after Zahn
                                     by Stephen A. Hilger

Indemnity clauses have become a very important part of the risk-shifting process which goes on when negotiating
construction contracts. Much has been written about indemnity, and the complexity of the indemnification issues can
be seen in the mere length of the current standard indemnity provisions.
Because of the implications of an indemnity clause, their effect is being challenged on a regular basis. The efforts at
creative lawyering were rebuffed recently by the Michigan Supreme Court in Zahn v Kroger Company of Michigan,
Docket No. 136382 (April 1, 2009). The Zahn case involved a construction site accident during the renovation of a
Kroger store. F. H. Martin Construction Company was the contractor and Cimarron Services, Inc. the drywall sub-
contractor. Zahn, an employee of Cimarron, fell from scaffolding while installing drywall. He brought a negligence
action against Kroger, who then filed a third party action against Martin for indemnity. Martin settled with Zahn and
brought a third party action against Cimarron to enforce the terms of an indemnity clause in the subcontract.
The indemnity language in the subcontract was cited in the opinion and was unambiguous and broad enough to cover
this type of claim. After a bench trial, the Trial Court concluded that Martin was 20% responsible and Cimarron 80%
responsible. The trial court found that Cimarron was not required to indemnify Martin for its own negligence, but was
required to indemnify Martin for Cimarron's 80% responsibility.
The Supreme Court's opinion dealt with an argument raised by Cimarron that under MCL 600.2956, a statute which
effectively eliminated joint and several liability in tort actions, the written indemnity clause was invalid to the extent that
it was rendered unenforceable under MCL 600.2956. If Cimarron was correct, this would have had far reaching conse-
quences in the contracting community as every indemnity issue would then be litigated.
The Supreme Court rejected the argument. It provided that parties can come to mutually acceptable agreements, and
where the terms of the agreements are unambiguous, parties can contractually govern themselves by spreading the
risk under a contract. The Supreme Court declined the invitation to re-write the contract between the parties. It also
determined that there is no indication that in passing MCL 600.2956, the Legislature intended to abrogate or re-write
contracts. The Court then correctly determined that MCL 600.2956 does not have the effect of re-writing contracts and
let stand the trial court's ruling.
The result is that parties who enter into unambiguous binding contracts will be held to otherwise enforceable indemnity
clauses and the statute eliminating joint and several liability in tort applications will not affect those agreements.

                                         “Common Work Areas” after Latham
                                     by Stephen A. Hilger

The construction environment poses risks and dangers to workers that are different from more typical work environ-
ments. During the course of construction, workers are often called upon to guard against many risks, open hazards,
and avoid the many other skilled workers and their respective supplies, tools, materials and equipment. Contractors
must also manage the potential liabilities that are heightened by the pace at which the work must be completed and
the different trades called upon to complete it. To completely avoid all risk is impossible and, until recently, general
con-tractors, property owners and construction managers were not relieved of bearing this immense risk.
In Funk v. General Motors Corp., 392 Mich. 91, 220 N.W.2d 641 (1974), the Michigan Supreme Court first created an
exception to the general rule of liability preclusion due to inherent risks. The Court in Funk determined that the burden
falls upon the general contractor to “assure that reasonable steps within its supervisory and coordinating authority are
taken to guard against readily observable, avoidable dangers in common work areas which create a high degree of risk
to a significant number of workmen.” Funk v. Gen. Motors Corp., 392 Mich. 91, 104, 220 N.W.2d 641 (1974). This ex-
ception, later termed the “common-area-work” doctrine, sought to promote workplace safety in the construction environ-
ment. As a result of this decision, to establish the liability of a general contractor, the post-Funk plaintiff was required to
prove four elements: “[1] that the contractor or owner failed to take reasonable steps within its supervisory and coordi-
nating authority, [2] to guard against readily observable and avoidable dangers, [3] that created a high degree of risk to
a significant number of workers, [4] in a common work area.” Id. at 104.
Post-Funk, the seemingly straight-forward elements required to establish liability proved difficult to apply in a variety of
factual scenarios. In particular, later courts faced with this issue struggled to pin-point and define the danger that would
give rise to a requisite duty on behalf of the general contractor for any injuries that occurred as a result.
In order to clear up this confusion, the Supreme Court has revisited the “Common Area Work” liability in Latham v.
Barton Marlow Company, 480 Mich. 105, 746 N.W.2d 868 (2008). In Latham, a carpenter working on a construction
site fell from a mezzanine level lift while not wearing the safety harness required by the general contractor. Id. at 110.
The carpenter subsequently sued the construction manager, Barton Marlow Company, for negligence under the
“common-work-area” doctrine. Id. at 108. The defendants argued that plaintiff failed to show that any other worker failed
to use fall protection and, therefore, failed to prove a significant number of workers were exposed to the risk as required
by the doctrine. Id. at 110.                                     3
                                                          “Common Work Areas” after Latham (continued)
                           LEGAL                             by Stephen A. Hilger  
                                            However, the trial court instead determined first, that the defendant was aware of
                                            the need for personal fall protection and, third that subcontractors were exposed
Thomas M. Keranen, Committee                to the risk the mezzanine height presented both before and after plaintiff’s injury.
Co-Chair                                    Id. at 109-10.
Keranen & Associates, PC, Southfield        The Court of Appeals affirmed the decision of the trial court and stated that the trial
Stephen A. Hilger, Committee                court correctly focused on the height of the mezzanine work area and the lack of
Co-Chair                                    perimeter protection, not the plaintiffs’ own failure to use personal fall protection.
Stephen A. Hilger & Associates, PC,         Id. at 110. However, the appellate court’s analysis, like other courts before it,
Grand Rapids                                misconstrued the “avoidable danger” element and, as a result, also confused the
Gabriela Ban, Walbridge, Detroit            preventive measures the general contractor was expected to undertake. The Court
Stan Buell, Grand River Construction,       of Appeals incorrectly determined that the danger at issue was merely the height
Hudsonville                                 itself. Id. at 113.
Peter Camps, Nemeth Burwell, P.C.,
Detroit                                     The Michigan Supreme Court stepped in to clarify the “avoidable danger” element
Peter Cavanaugh, Cavanaugh &                of the common-work-area doctrine. The Court held that the danger cannot be the
Quesada, Royal Oak                          physical characteristics of the worksite, but instead must be a truly “avoidable
Joseph DeLave, Dickinson Wright, PLLC,
Bloomfield Hills
                                            danger.” The danger at issue could not be merely the ability to access an elevated
Tom Dyze, Walbridge, Detroit                area. Id. at 113-14. Instead, the danger presented was accessing an elevated area
Pat Facca, Facca, Richter & Pregler, Troy   without wearing personal fall-protection. Id. at 114. Unlike the lower courts’
Steve Frederickson, The Christman           satisfaction in finding the height was the danger to be avoided, the Supreme Court
Company, Lansing                            correctly converted the “danger,” the height at which the work was to be performed,
Martin Frenkel, Maddin, Hauser, Wartell,
Roth & Heller, Southfield
                                            into an “avoidable danger,” through the use of fall-protection equipment. Id. Thus,
Scott Graham, Scott Graham PLLC,            for a claim to exist a significant number of workers must also be exposed to the risk
Kalamazoo                                   associated with a failure to use fall-protection equipment at high heights. Id.
Ben Hammond, Smith, Haughey, Rice &         In short, this decision represents a significant departure from how most of us in
Roegge, Grand Rapids
                                            business today have viewed potential job-site liability issues.
David Hayes, Clark Hill, PLC, Lansing
Scott Hechlik, Osprey Construction,         As a result, the Court determined that because the plaintiff did not submit evidence
Brighton                                    and, therefore, could not prove that any other worker was exposed to the danger of
Kevin Hendrick, Clark Hill, PLC, Detroit
Richard T. Hewlett, Butzel Long, Ann
                                            working at that height without fall-protection, the “significant number of workers”
Arbor                                       element was not satisfied. Id. Consequently, the plaintiff’s claim could not proceed
David Houston, Dickinson Wright, PLLC,      and the lower courts erred in not granting defendant’s motion for summary
Lansing                                     disposition. Id.
Susan Koval, Nemeth Burwell, P.C.,
Detroit                                     In summary, the Court’s most recent common-work-area doctrine case law turned
Aileen Leipprandt, Miller Johnson, Grand    on whether the danger at issue was the height itself or working at that height without
David M. Lick, Foster Swift Collins &
                                            fall-protection equipment. While it is true that a significant number of workers were
Smith, Lansing                              exposed to working at various heights, this is an unavoidable condition of most
Frank Mamat, Foster Swift Collins &         construction work. However, as the facts had shown, the carpenter was the only
Smith, Farmington Hills                     employee exposed to the danger of working that height without a harness. As a
Mark McAlpine, McAlpine & McAlpine,         result, a significant number of workers were not exposed to the now properly
PC, Auburn Hills
Brian Moore, Moore Trosper Construction,
                                            characterized avoidable danger and the common-work-area doctrine did not
Holt                                        apply. Thus, the general contractor could not be held liable.
Raymond O’Dea, Keranen & Associates,
                                            The Latham case allows general contractors, property owners and construction
Chris Parfitt, Deneweth, Dugan & Parfitt,   management to breathe a sigh of relief and suggests that the workers themselves
PC, Troy                                    need to be more vigilant about their own protection. The decision represents a
Ted Peters, Sullivan Ward Asher & Patton,   general contractor’s responsibility to protect workers from avoidable rather than
Southfield                                  inherent dangers. The courts’ analysis shifts the common-work-area doctrine from
Tom Porter, Barton Malow Co., Southfield
Bob Rabeler, Soil & Materials Engineers,
                                            strict liability back to an obligation to take reasonable steps to prevent injury.
Grand Rapids
Gary Reeves, Bodman LLP, Troy
James Schmid, Grant Thornton LLP,                    These articles are intended to highlight a specific area of the law. This
Southfield                                          communication is not legal advice. The reader should consult an attorney
John Sier, Kitch, Drutchas, Wagner,                    to determine how the information applies to any specific situation.
Denardis & Valitutti, Detroit
Neil Steinkamp, Stout Risius Ross, Inc.,
Southfield                                                               Published by the AGC of Michigan
John Tesija, Novara Tesija, Southfield              Lansing Office                                        Detroit Office
Jeff Theuer, Loomis Ewert Parsley, Davis            2323 N. Larch Street                                  26001 Five Mile Road
& Gotting, Lansing                                  LANSING, MI 48906                                     REDFORD, MI 48239
Ron Torbert, Barton Malow Co., Southfield           Phone: (517) 371-1550                                 Phone: (313) 533-3509
Staff Representative: Claudia Jefcoat

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