Table of
contents
FORWARD .......................................................................xv
ACKNOWLEDGMENTS .......................................................................xvii
ABOUT THE AUTHORS .......................................................................xix
CHAPTER 1 .......................................................................1
SOURCES OF KENTUCKY CONSTRUCTION LAW .......................................................................1
By: Buckner Hinkle, Jr. and David B. Ratterman .......................................................................1
1.1 Statutes And Regulations .......................................................................1
1.2 Common Law (“Case Law”) .......................................................................1
1.3 Local Ordinances .......................................................................2
CHAPTER 2 .......................................................................3
BUSINESS ENTITY TYPES .......................................................................3
By: David E. Longenecker .......................................................................3
2.1 Sole Proprietorship .......................................................................3
2.1.1 Structural Considerations .......................................................................3
2.1.1.1 Tax Considerations .......................................................................4
2.2 Partnerships .......................................................................4
2.2.1 Structural Considerations .......................................................................4
2.2.1.1 General Partnerships .......................................................................4
2.2.1.2 Limited Liability Partnerships .......................................................................5
2.2.1.3 Limited Partnerships .......................................................................5
2.2.2 Partnership Tax Considerations .......................................................................6
2.3 Joint Venture .......................................................................6
2.4 Limited Liability Company .......................................................................7
2.4.1 Structural Considerations .......................................................................7
2.4.2 Tax Considerations .......................................................................8
2.5 Corporations .......................................................................8
2.5.1 Structural Considerations .......................................................................8
2.5.2 Tax Considerations .......................................................................9
2.6 Piercing The Corporate Veil .......................................................................10
2.6.1 Personal Liability For Nonpayment When A Corporate Owner, Officer, Or Director Abuses The Corporate
Form, Or When A Subsidiary Is A Tool Of Its Parent .......................................................................10
PRACTICE POINTERS .......................................................................12
CHAPTER 3 .......................................................................15
CONSTRUCTION LENDING .......................................................................15
By: James R. Williamson .......................................................................15
3.1 Introduction .......................................................................15
3.2 Construction Loan And Permanent Loan Interplay (Commitment Issues) .......................................................................15
3.3 Risks Associated With Construction Lending .......................................................................18
3.4 Construction Loan Agreement .......................................................................20
3.5 Due Diligence .......................................................................22
3.6 Advancing Of Construction Loan Proceeds .......................................................................24
3.7 Defaults And Remedies .......................................................................28
PRACTICE POINTERS .......................................................................30
CHAPTER 4 .......................................................................33
DESIGN PROFESSIONAL AND CONTRACTOR LICENSING .......................................................................33
By: Buckner Hinkle, Jr. .......................................................................33
4.1 Licensing Of Design Professionals .......................................................................33
4.1.1 Engineering .......................................................................33
4.1.1.1 The Practice Of Engineering .......................................................................33
4.1.1.2 Engineers Performing Services That Do Not Constitute
The “Practice Of Engineering” .......................................................................34
4.1.1.3 Business Names And Advertisements Using “Engineer”
Or “Engineering” .......................................................................35
4.1.1.4 When An Engineering License Is Not Required .......................................................................36
4.1.1.5 The Practice Of Engineering Through Business Entities .......................................................................36
4.1.1.6 Reciprocity .......................................................................37
4.1.2 Architecture .......................................................................37
4.1.2.1 The Practice Of Architecture .......................................................................37
4.1.2.2 Exceptions To The Licensing Requirement .......................................................................38
4.1.3 The Practice Of Architecture Through Business Entities .......................................................................39
4.1.4 Reciprocity .......................................................................39
4.2 Enforceability Of Contracts By Unlicensed Design Professionals .......................................................................40
4.3 Expert Testimony .......................................................................41
4.3.1 Engineers .......................................................................42
4.3.2 Architects .......................................................................42
4.3.3 Analysis .......................................................................42
4.4 General Contractor Licensing .......................................................................43
4.4.1 Plumbers .......................................................................43
4.4.1.1 Plumbing Defined .......................................................................43
4.4.1.2 Insurance .......................................................................44
4.4.1.3 Reciprocity .......................................................................44
4.4.2 Electrical Contractors .......................................................................44
4.4.2.1 Electrical Contractor Defined .......................................................................44
4.4.3 Asbestos Contractors .......................................................................45
4.4.4 Fire Protection Sprinkler Contractors .......................................................................45
4.4.4.1 Exceptions To License Requirement .......................................................................45
4.4.4.2 Special Restrictions .......................................................................45
4.4.4.3 Local Work .......................................................................46
4.4.5 HVAC Contractors .......................................................................46
4.4.6 New Boiler And Pressure Vessel Contractors .......................................................................47
4.4.7 Underground Petroleum Storage Tank Contractors .......................................................................47
4.4.8 Local Licensing And Registration Requirements For
General Contractors .......................................................................47
4.4.9 Lexington-Fayette Urban County Government .......................................................................47
4.4.10 Louisville-Jefferson County Metro Government .......................................................................49
PRACTICE POINTERS .......................................................................50
CHAPTER 5 .......................................................................55
BUILDING CODES AND PERMITS .......................................................................55
By: Angela R. Stephens, Kenneth J. Gish, Jr., and Zachary D. Jones .......................................................................55
5.1 Applicable Codes .......................................................................55
5.1.1 Kentucky Building Code .......................................................................55
5.1.2 Kentucky Residential Code .......................................................................55
5.2 Enforcement Of Codes Through Civil Actions .......................................................................56
5.2.1 KY. REV. STAT. § 198B.130 .......................................................................56
5.2.2 Building Inspectors .......................................................................56
5.2.3 Certificates Of Occupancy .......................................................................57
5.3 Building Permits .......................................................................57
5.3.1 When Is A Permit Required .......................................................................57
5.3.2 Process To Obtain A Permit .......................................................................57
5.4 Buildings That Must Be Designed By A Licensed Architect And/Or A Licensed Engineer (KY. REV.
STAT. § 323.033) .......................................................................58
5.4.1 Special Inspections That Must Be Provided By Owner
or Design Professional .......................................................................59
5.5 Kentucky State Board On Electric Generation And Transmission Siting .......................................................................59
5.6 Kentucky Energy & Environment Cabinet Permits .......................................................................60
PRACTICE POINTERS .......................................................................61
CHAPTER 6 .......................................................................63
BIDDING AND OTHER PROCUREMENT METHODS .......................................................................63
By: Buckner Hinkle, Jr .......................................................................63
6.1 Introduction .......................................................................63
6.2 The Scope Of Kentucky’s Procurement Statutes .......................................................................63
6.3 Construction Procurement Procedures .......................................................................64
6.4 Methods Of Contracting .......................................................................64
6.5 Criteria For Award .......................................................................64
6.6 Exemptions From Competitive Bidding .......................................................................65
6.7 Public School And Local Government Projects .......................................................................66
6.8 Bidder Prequalification .......................................................................67
6.9 Bidding Mistakes .......................................................................68
6.10 Subcontracting .......................................................................68
6.11 Bid Protests .......................................................................68
6.12 Reciprocal Resident Bidder Preference .......................................................................70
6.13 Unfair Trade Practices .......................................................................70
CHAPTER 7 .......................................................................75
CONSTRUCTION CONTRACT LAW .......................................................................75
By: Gregory P. Parsons .......................................................................75
7.1 Contract Essentials .......................................................................75
7.2 Types Of Contracts .......................................................................77
7.3 Contract Interpretation .......................................................................78
7.3.1 The Parol Evidence Rule .......................................................................78
7.3.2 Intent Of Parties .......................................................................79
7.3.3 Common And Technical Meanings Of Contract Language ....................................................................... 79
7.3.4 Contracts To Be Interpreted Reasonably .......................................................................79
7.3.5 Contract Interpreted As A Whole .......................................................................80
7.3.6 Course Of Performance Or Prior Dealings .......................................................................80
7.3.7 Ambiguous Terms Construed Against The Drafter .......................................................................80
7.3.8 Specific Over General Terms .......................................................................81
7.3.9 Handwritten Terms Preferred Over Typed Or Printed
Terms .......................................................................81
7.3.10 Exclusion By Inclusion .......................................................................81
7.4 Key Contract Clauses .......................................................................82
7.4.1 Incorporation By Reference .......................................................................82
7.4.2 Flow Down Clauses .......................................................................82
7.4.3 Choice Of Law .......................................................................83
7.4.4 Forum Selection Clauses .......................................................................83
7.4.5 Scope Of Work And Changes .......................................................................83
7.4.6 Liquidated Damages .......................................................................84
7.4.7 Indemnity .......................................................................84
7.4.8 Notice .......................................................................85
7.4.9 Time Of Completion .......................................................................85
7.4.10 No Damage For Delay .......................................................................86
7.4.11 Right To Stop Work .......................................................................86
7.4.12 Right To Terminate .......................................................................86
7.4.13 Waiver Of Consequential Damages .......................................................................87
7.4.14 Alternative Dispute Resolution .......................................................................88
7.4.15 Changed Conditions .......................................................................88
7.4.16 Contingent Payment Clauses .......................................................................89
7.4.17 Retainage .......................................................................91
7.5 Applicability Of The Uniform Commercial Code To Construction ....................................................................... 92
PRACTICE POINTERS .......................................................................92
CHAPTER 8 .......................................................................97
BONDS AND INSURANCE IN KENTUCKY .......................................................................97
By: Anne E. Gorham .......................................................................97
8.1 Bonds .......................................................................97
8.1.1 Bid Bonds .......................................................................98
8.1.2 Performance Bonds .......................................................................99
8.1.3 Payment Bonds .......................................................................99
8.2 Insurance .......................................................................100
8.2.1 Insurance For Construction Projects In Kentucky .......................................................................100
8.2.2 Rules Of Interpretation For Insurance Policies In Kentucky ....................................................................... 100
8.2.3 Builders’ Risk Insurance vs. Property Insurance .......................................................................101
8.2.4 Commercial General Liability Insurance And The
Indemnity Agreement .......................................................................101
PRACTICE POINTERS .......................................................................102
CHAPTER 9 .......................................................................105
CHANGE ORDERS .......................................................................105
By: Joseph L. Hardesty and Angela R. Stephens .......................................................................105
9.1 The Reality Of Construction Contract Modification .......................................................................105
9.2 Change Orders In General .......................................................................105
9.3 Formal Change Procedures .......................................................................106
9.4 Change Orders v. Construction Change Directives .......................................................................107
9.5 Change Orders v. The Cardinal Change Doctrine .......................................................................107
9.6 Consideration For Contract Modifications .......................................................................108
9.7 Contractor’s Duty To Proceed With Disputed Work;
And Constructive Changes .......................................................................109
9.8 Over-Meticulous Inspection And The Acceptance Of
The Work .......................................................................109
9.9 Public Contracts .......................................................................110
PRACTICE POINTERS .......................................................................110
CHAPTER 10 .......................................................................113
MECHANICS’ AND MATERIALMEN’S LIENS .......................................................................113
By: Buckner Hinkle, Jr .......................................................................113
10.1 Right To A Mechanics’ Lien .......................................................................113
10.1.1 Nature Of Services Rendered And Materials Furnished .......................................................................114
10.1.1.1 Labor .......................................................................114
10.1.1.2 Materials .......................................................................114
10.1.1.3 Supplies .......................................................................115
10.1.1.4 Preparatory Or Fabricating Work .......................................................................116
10.1.1.5 Overhead, Insurance, Taxes, And Profit .......................................................................116
10.1.1.6 Delay Damages .......................................................................116
10.1.2 Necessity Of Written Contract Or Consent Of Owner .......................................................................117
10.1.3 Persons Entitled To A Lien .......................................................................117
10.1.4 Engineers’, Architects’, And Land Surveyors’ Liens .......................................................................117
10.1.5 Residential Construction Liens .......................................................................118
10.2 Interests Subject To Mechanics’ Liens .......................................................................118
10.2.1 Private Projects .......................................................................118
10.2.1.1 Projects Involving Leasehold Interests .......................................................................119
10.2.2 Fixtures .......................................................................120
10.2.3 Public Projects .......................................................................120
10.3 Perfecting A Mechanics’ Lien .......................................................................121
10.3.1 Private Projects .......................................................................121
10.3.1.1 Preliminary Statement Of Lien .......................................................................121
10.3.1.2 Preliminary Notice Of Intent To File A Lien .......................................................................121
10.3.1.2.1 Extra Work .......................................................................122
10.3.1.3 Filing The Statement Of Lien .......................................................................124
10.3.1.3.1 Time For Filing .......................................................................124
10.3.1.3.2 Form And Content .......................................................................125
10.3.1.3.3 Place For Filing .......................................................................126
10.3.1.4 Notice Of Filing .......................................................................126
10.3.1.5 Amendment Of Lien Statement .......................................................................126
10.3.1.6 Filing One Or More Lien Statements .......................................................................126
10.3.2 Public Projects .......................................................................127
10.3.2.1 Preliminary Lien Statement .......................................................................127
10.3.2.2 Filing The Statement Of Lien .......................................................................128
10.3.2.2.1 Time For Filing .......................................................................128
10.3.2.2.2 Form And Content .......................................................................128
10.3.2.2.3 Place For Filing .......................................................................129
10.3.2.2.4 Perfecting The Lien .......................................................................129
10.3.2.2.5 Protest By Contractor .......................................................................129
10.4 Operation And Effect Of A Perfected Mechanics’ Lien
On Private Projects .......................................................................130
10.4.1 Amount And Extent Of Lien .......................................................................130
10.4.2 Accrual And Duration Of Lien .......................................................................130
10.5 Lien Priority .......................................................................131
10.5.1 Priority Between Mechanics’ Lien Claimants And
Other Creditors .......................................................................131
10.5.2 Priority Between General Contractors, Subcontractors,
And Materialmen .......................................................................132
10.5.3 Limitations On The Amount Of Mechanics’ Lien
Claims .......................................................................133
10.5.4 Public Projects .......................................................................134
10.5.5 Kentucky Cases Involving The Priority Of Mechanics’
Liens .......................................................................135
10.6 Enforcement Of A Mechanics’ Lien .......................................................................136
10.6.1 Time To Sue .......................................................................137
10.6.2 Parties To The Lawsuit .......................................................................137
10.6.3 Venue .......................................................................137
10.6.4 The Complaint .......................................................................138
10.6.4.1 Other Claims .......................................................................138
10.6.5 Execution And Enforcement Of Judgment .......................................................................139
10.7 Lien Prevention And Defenses .......................................................................139
10.7.1 Pre-Project Due Diligence .......................................................................140
10.7.2 Payment Bonds .......................................................................140
10.7.3 Contractual Mechanics’ Lien Waivers .......................................................................141
10.7.4 Releases And Waivers Of Lien During Performance .......................................................................142
10.7.5 Bonding Off Liens .......................................................................143
10.7.6 Payment .......................................................................144
10.7.7 Releases Of Mechanics’ Liens .......................................................................145
10.8 Sales, Evictions, And Forfeitures .......................................................................146
10.9 Bankruptcy Issues .......................................................................147
10.9.1 The Automatic Stay .......................................................................147
10.9.2 Kentucky Bankruptcy Decisions .......................................................................148
PRACTICE POINTERS .......................................................................150
CHAPTER 11 .......................................................................157
CONSTRUCTION DISPUTES – THEORIES OF LIABILITY .......................................................................157
By: Anne E. Gorham .......................................................................157
11.1 Breach Of Contract .......................................................................157
11.1.1 Breach Of Warranty .......................................................................157
11.1.1.1 Express Warranties .......................................................................157
11.1.1.2 Implied Warranties .......................................................................158
11.1.1.3 Owner’s Implied Warranty With Respect To The
Accuracy And Suitability Of Plans .......................................................................158
11.1.2 Contractual Indemnity .......................................................................159
11.1.3 Third Party Beneficiaries .......................................................................160
11.2 Implied Contracts .......................................................................160
11.2.1 Promissory Estoppel .......................................................................161
11.2.2 Quantum Meruit .......................................................................161
11.3 Torts .......................................................................162
11.3.1 Negligence .......................................................................162
11.3.1.1 Negligence Between Parties Who Are In Privity Of
Contract .......................................................................163
11.3.2 Negligent Misrepresentation .......................................................................164
11.3.3 Fraud .......................................................................166
11.3.4 Common Law Indemnity .......................................................................166
11.3.5 Economic Loss Rule .......................................................................167
11.4 Statutory Actions .......................................................................168
11.4.1 Violation Of Building Code .......................................................................168
11.4.2 Mechanics’ Liens .......................................................................169
11.4.3 Failure To Make A Required Disposition Of Funds .......................................................................169
11.4.3.1 KY. REV. STAT. § 376.070 .......................................................................169
11.4.3.2 KY. REV. STAT. § 514.070 .......................................................................170
11.4.3.3 Conversion .......................................................................171
11.4.4 Violation of Kentucky Fairness Act .......................................................................171
CHAPTER 12 .......................................................................175
STATUTES OF LIMITATION .......................................................................175
By: Steven M. Henderson .......................................................................175
12.1 Statutes Of Limitations For Contract Actions .......................................................................175
12.1.1 Written Contracts (10 Years) .......................................................................176
12.1.2 Oral Contract (5 Years) .......................................................................177
12.1.3 Bond Claims (7 Years) .......................................................................178
12.1.4 Fraud .......................................................................178
12.2 Statutes Of Limitations Applicable To Tort Actions .......................................................................179
12.2.1 General Negligence Claims .......................................................................179
12.2.1.1 Negligence Resulting In Personal Injury .......................................................................179
12.2.1.1.1 Statutes Of Repose Applied To Personal Injury Claims
Are Unconstitutional .......................................................................180
12.2.1.2 Negligence Resulting In Property Damage .......................................................................182
12.2.1.2.1 Claims For Trespass To Real Or Personal Property .......................................................................182
12.2.1.2.2 Claims For Taking, Detaining, Or Injuring Personal
Property .......................................................................183
12.2.2 Professional Negligence .......................................................................183
12.2.2.1 Definition Of “Professional” .......................................................................183
12.2.2.2 Accrual Of The Cause Of Action .......................................................................184
12.2.2.3 Potential Exceptions Where A Professional Will Not Be Subject To KY. REV. STAT. § 413.245 ....................................................................... 185
12.2.3 Intentional Interference With Business Relationship .......................................................................186
12.2.4 Common Law Indemnity .......................................................................186
12.2.5 Building Code Violation .......................................................................187
12.2.6 Action For Damages Against Home Inspector – KY.
REV. STAT. § 198B.734 .......................................................................187
12.3 Claims Against The Commonwealth .......................................................................187
12.3.1 Contract Claims .......................................................................188
12.3.2 Negligence Claims .......................................................................189
12.4 Mechanics’ Liens .......................................................................190
CHAPTER 13 .......................................................................199
DAMAGES AND REMEDIES .......................................................................199
By: Cassidy Ruschell Rosenthal .......................................................................199
13.1 Consequential Damages .......................................................................199
13.1.1 Definition Of Consequential Damages .......................................................................199
13.1.2 Waiver Of Consequential Damages .......................................................................201
13.1.3 Waiver Of Consequential Damages Under The UCC .......................................................................202
13.1.4 Lost Profits .......................................................................202
13.2 Liquidated Damages .......................................................................204
13.3 Delay Damages .......................................................................205
13.3.1 Contractor Delay Damages .......................................................................206
13.3.2 No Damages For Delay Clause .......................................................................207
13.3.3 Acceleration .......................................................................208
13.4 Damages For Defective Construction .......................................................................209
13.5 Total Cost Claims .......................................................................211
13.6 Attorneys’ Fees .......................................................................212
13.7 Punitive Damages .......................................................................213
13.8 Interest .......................................................................213
13.9 Mitigation Of Damages .......................................................................214
13.9.1 Contract For Sale Of Goods .......................................................................215
13.9.2 General Contractors And Subcontractors .......................................................................215
13.10 Injunctive Relief .......................................................................216
13.11 Prejudgment Attachments .......................................................................216
13.11.1 Grounds For Attachment .......................................................................217
13.11.2 Property Subject To Attachment .......................................................................218
13.11.3 Effect Of An Attachment .......................................................................218
13.11.4 Procedures To Obtain An Attachment .......................................................................218
13.11.5 Liability For Wrongful Attachment .......................................................................219
13.12 Enforcement Of Judgments .......................................................................220
13.12.1 Garnishments .......................................................................220
13.12.1.1 Wage Garnishment .......................................................................221
13.12.1.2 Wages Exempt From Garnishment .......................................................................222
13.12.1.3 Non-Wage Garnishment .......................................................................222
13.12.2 Levy Against Property .......................................................................222
PRACTICE POINTERS .......................................................................223
CHAPTER 14 .......................................................................231
ALTERNATIVE DISPUTE RESOLUTION .......................................................................231
By: Gregory P. Parsons .......................................................................231
14.1 Mediation .......................................................................232
14.2 Arbitration .......................................................................233
14.2.1 Modern Kentucky Arbitration Law .......................................................................234
14.2.2 Enforceability .......................................................................235
14.2.2.1 Under The Kentucky Arbitration Act, Agreements To
Arbitrate Future Disputes Are Enforceable .......................................................................235
14.2.2.2 Arbitration Clauses Incorporated By Reference Are Enforceable ....................................................................... 236
14.2.2.3 Arbitration Clauses Are Not Enforceable If Waived By
Either Party .......................................................................237
14.2.2.3.1 If Neither Party Compels Arbitration, Then The Parties
May Litigate .......................................................................237
14.2.2.3.2 If One Party Participates In A Judicial Proceeding, Then That Party Waived Its Right To Compel
Arbitration .......................................................................238
14.2.2.3.3 Parties May Modify The General Waiver Rule By
Contract .......................................................................239
14.2.2.4 A Claim Of Fraud In The Inducement Is Arbitrable .......................................................................239
14.2.3 Scope Of Arbitration Clauses .......................................................................239
14.2.3.1 Arbitrator’s Decision Must Be Within Scope Of Submission .......................................................................239
14.2.3.2 Arbitrator Decides Procedural Issues .......................................................................240
14.2.4 Applicability To Sureties .......................................................................240
14.2.4.1 Surety Bonds Are Distinguishable From Insurance
Contracts .......................................................................240
14.2.4.2 Surety Bonds Are Subject To Arbitration Clauses That
Are Incorporated By Reference In The Prime Contract .......................................................................241
14.2.5 Consolidation .......................................................................242
14.2.6 Enforcement Of Arbitration Awards .......................................................................243
14.2.6.1 Kentucky Appellate Courts Can Reverse Arbitration
Awards .......................................................................243
14.2.6.2 Standard Of Review To Set Aside Arbitration Award .......................................................................244
14.2.6.3 The Time Limit To Challenge An Award Is The Same
As The Time Limit In Civil Actions .......................................................................245
14.2.6.4 The “Default” Rule In Kentucky Is That The
Arbitration Award Will Be Enforced....................................................................... 245
14.2.7 Liability Of Arbitrators .......................................................................245
14.2.8 Conclusion .......................................................................246
PRACTICE POINTERS .......................................................................246
CHAPTER 15 .......................................................................253
RESIDENTIAL CONSTRUCTION .......................................................................253
By: Joseph L. Hardesty and Angela R. Stephens .......................................................................253
15.1 Construction Professionals’ Opportunity To Repair Act .......................................................................253
15.2 Mechanics’ And Materialmen’s Liens .......................................................................255
15.3 Homeowner Claims Against Homebuilders .......................................................................256
15.3.1 Breach Of Implied Warranty Of Habitability .......................................................................257
15.3.2 Negligence And Negligence Per Se .......................................................................257
15.3.3 Violation Of Building Code .......................................................................258
15.3.4 Consumer Protection Act .......................................................................258
PRACTICE POINTERS .......................................................................258
APPENDIX .......................................................................261
STATUTES AND REGULATIONS FOR THE CONSTRUCTION INDUSTRY .......................................................................261
CONTACT INFORMATION .......................................................................267
