eNews November 1, 2018
In the News
November 1, 2018
October CMI Falls Sharply as Holiday Season Begins
NACM’s Credit Managers’ Index (CMI) fell sharply for the month of October, dipping by the biggest margin since April. The combined score still remains in expansion territory (reading over 50) at 54.5, a drop of almost two points from September. The favorable factors for both the manufacturing and service sectors saw the biggest decline with the unfavorables seeing a much smaller drop.
Despite a decrease in the combined favorables, they remain comfortably in the expansion zone with numbers in the 60s. The drop is noteworthy, however, as the favorables fell about four points from last month, reaching the lowest point since April.
The combined unfavorables also saw a significant drop as these categories headed into contraction territory at 49.7, a reading that hasn’t been that low since April. This reading remains the most worrisome, as all but two of the categories have entered contraction territory. Accounts placed for collection fell back into contraction after being in expansion in June and September, while dollar amount beyond terms fell deeper into contraction. Filings for bankruptcy, while still in expansion, dipped to the lowest point since 2016, coming in at 52.1 after dropping 3.5 points.
“There has been a pattern as far as slowdowns are concerned. The first phase is that some of the motivation for a growing economy begins to erode. That appears to be what has been seen with the weaker favorable factors and trouble for the unfavorables as well,” said NACM Economist Chris Kuehl, Ph.D. “The next step is the unfavorable readings begin to falter, suggesting companies are starting to face a real crisis from which they may not be able to easily recover.”
Both the favorables and unfavorables for manufacturing and service took a combined hit, with sales seeing the biggest drop at more than six points in each sector—unseasonable for this time of year. Typically, the service sector carries the CMI through the holiday season as retail picks up toward the end of the year. The drop in sales could mean retailers purchased holiday goods earlier than usual this year, a possibility given the upticks in September and June’s service sales.
“Up to this point, the various challenges companies have faced have not been as serious as all this; now that may be changing,” Kuehl said. “This would mean many companies are not very resilient and will need some good luck to survive any kind of a slowdown by the economy as a whole.”
When Kuehl compared the latest index to October 2017’s CMI, the service sector appeared less stable than last year, indicating a chance for long-term concern.
“This was a fairly profound slide which comes at an awkward time,” Kuehl said. “This is the time of year services should be carrying the load but it isn’t at the moment, while manufacturing generally slides until the first of the year.”
—Christie Citranglo, editorial associate
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Teaching an Old Dog New Tricks: The Spearin Doctrine and Design-Build Projects, Part II
Part I of this article appeared in last week’s eNews on Oct. 25 with background information about the case.
Ultimately, the Bonita Pipeline court found the subcontractor’s position persuasive, finding that the Spearin doctrine applies to design-build projects. Regardless, the Bonita Pipeline court denied the plaintiff subcontractor’s partial motion for summary judgment, finding there were insufficient facts in the record to determine whether the contractor’s extra work was due to errors in the plans and specifications, or whether the extra work was due to the design work expected of the subcontractor.
In support of its ruling, the Bonita Pipeline court relied on a United States Court of Federal Claims case, AAB Joint Venture v. United States, 75 Fed.Cl. 414 (Fed.Cl. 2007). In AAB Joint Venture, the plaintiff contractor won a bid to construct a military storage base in Israel, whereby the project was in a design-build format. The plaintiff was provided specifications from the government, and after construction commenced, the plaintiff contractor submitted a request for information questioning the accuracy of the specifications. After further requests for information and responses thereto, the plaintiff contractor (and its subcontractors) performed earthwork using three-inch stone fill, as opposed to a six-inch maximum stone fill as specified in the contract. The use of the smaller fill, however, precluded use of the contract-specified density test, as the test could not be used on the smaller fill. Thereafter, plaintiff contractor sought an equitable adjustment as a result of the defective specifications and increased costs, which was denied.
The AAB Joint Venture court found that the Spearin doctrine applied to the design-build project. It held that “[t]he purpose of the specifications is to serve as a guide to the contractor. … The contractor should be able to rely on a reasonable interpretation of the contract. The standard that must be met under the implied warranty is that the specifications will result in a satisfactory, acceptable, or adequate result; short of that, the specifications are defective and the contractor is entitled to an equitable adjustment.” There, the specifications provided a range of sizes for fill that could be used by the subcontractor, though some sizes in turn precluded use of the contract-specified density test. The AAB Joint Venture court held that the fact the specifications allowed for some satisfactory results did not preclude a finding that they were defective. In other words, “[d]efective specifications may be found when the full scope of the dimension tolerances set forth in the specifications do not produce satisfactory results.”
The Bonita Pipeline court also relied on a Civilian Board of Contract Appeals case, Drennon Constr. & Consulting, Inc. (“Drennon”), 13 B.C.A. (CCH) ¶ 35,213 (2013). In Drennon, the plaintiff contracted with the Bureau of Land Management (“BLM”) to widen a road at a campground in central Alaska. Widening the road required excavating a hillside, and building a gabion wall along the cut. The hillside ultimately collapsed, and the contractor’s work was placed on suspension. Ultimately, the road was widened without the use of a gabion wall, and the contractor sought recovery for its costs during the suspension period, as well as the cost of purchasing gabions for which it no longer had use. The contractor contended that the geotechnical information provided in the BLM’s solicitation was defective. In contrast, the BLM argued that the contract was one of design-build, and that the contractor was not entitled to any recovery because of the contractor’s own faulty design.
The Drennon panel sided with the contractor, finding that the hillside would have collapsed regardless of the approach undertaken by the contractor. The court pointed out the solicitation included a road design and specifications from the civil and geotechnical engineer. The engineer testified that the digital terrain model it utilized for its design contained inaccurate control points, and that the BLM denied the engineer’s request to perform a survey to address the inaccuracies. On that basis, the engineer testified they intentionally added language to the solicitation that would have warned potential bidders of the inaccuracies of the model. The Drennon panel found this directly contributed to the increased costs suffered by the contractor. The Drennon panel also found the engineer’s geotechnical report was defective, noting the site conditions experienced by the contractor were materially different than what was described in the report.
Bonita Pipeline shows the Spearin doctrine is still alive and well, and even permeating into modern construction projects. The doctrine’s application to a design-build project at the United States District Court level shows that it is moving of specialized venues such as the Federal Court of Claims and Board of Contract Appeals. The Spearin doctrine reaches its centennial anniversary this year on Dec. 9, 2018.
Reprinted with permission.
John Castro is an associate in Gordon Rees Scully Mansukhani LLP’s construction group. He represents developers, contractors and design professionals in all facets of construction law.
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Construction Outlook Steady, Stable in Near Term
The construction industry will see modest growth over the next year and beyond and remain relatively stable over that time. U.S. construction is expected to continue its growth this year and next; however, 2019 will see a slight step back.
Through the first half of 2018, construction spending increased by 5.8%, according to Moody’s Investors Service—within their expected range of 4%–6% for this year. Yet, the rating agency predicts a slowdown to 3%–5% growth in 2019.
The current positive sentiment is due to moderate improvement in nonresidential construction and a large jump in residential construction. Directly influencing the construction industry in the U.S. were “low unemployment, steady wage gains, high consumer confidence and low housing inventories,” states Moody’s October global construction report. The forecasted setback next year is from “rising interest rates, more difficult comparisons and the age of the current economic recovery.”
“Continued strong economic growth in a number of major developed and emerging markets coupled with attractive financing conditions on the back of very low interest rates will boost average global construction industry revenues by 5% into 2019, keeping our outlook on the sector stable,” said Goetz Grossman, an assistant vice president with Moody’s, in a release on the construction report.
Meanwhile, Dodge Data & Analytics predicts U.S. construction starts will increase by the smallest of margins in 2019—$1 billion—from the estimated $807 billion in 2018.
“Over the past three years, the expansion for the U.S. construction industry has shown deceleration in its rate of growth, a pattern that typically takes place as an expansion matures,” said Robert A. Murray, chief economist for Dodge Data & Analytics. “After advancing 11% to 14% each year from 2012 through 2015, total construction starts climbed 7% in both 2016 and 2017, and a 3% increase is estimated for 2018.”
According to Murray, there are “mounting headwinds” that could affect the construction industry such as rising interest rates and higher material costs. Dodge expects multifamily housing and commercial building to decline next year. Institutional building and public works construction are among the sectors that will see an increase in activity.
In its latest construction outlook report, the New York Building Congress states nonresidential construction spending will reach $39 billion in New York City this year, up $15.5 billion from 2017. However, nonresidential spending will slide to roughly $30 billion in 2019 and back down to numbers seen in 2017 by 2020. The City is expected to have a 25% increase—a new record—in total construction spending this year compared to last year.
Moody’s construction outlook has been stable since 2017, but the perspective could swing either way to positive or negative should certain factors occur. Additional revenue growth is among the factors to help propel the outlook toward positive, while the opposite would happen should revenues decline. Among the risks to the current outlook include a rise in interest rates and a shortage of skilled labor, which is already a well-documented problem in the U.S. and abroad. “Labour shortages and increased building costs are key factors currently constraining the sector. These factors could potentially prevent construction activity from accelerating beyond our expectations next year,” according to Moody’s.
—Michael Miller, managing editor
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E-Docs Changing Business Payments
Question: What Are Three Documents I Thought Would Never Be Done Electronically?
Answer: Electronic Promissory Notes, Electronic Notarizations, Electronic Wills, Oh My!
"Toto, I've a feeling we're not in Kansas anymore."
Many days, the changes in the world of business make me feel like Dorothy waking up in Oz. The novelty and colors of change make me yearn for the predictable black and white of Kansas.
When I started practicing law there were still court reporters using steno pads and shorthand to keep the record of depositions. Contracts were typed on 8 ½ by 14-inch legal paper and copies were made with carbon paper. Photocopy machines were a new and undependable technology in offices. People mailed letters! We couldn't have imagined something like a fax machine. Legal research was done using books. Notes were taken on sheets of paper in long-hand writing.
People composed complete and coherent thoughts, arguments and documents before transmitting piecemeal and unconnected stream-of-consciousness responses and attempts to communicate. I remember the challenges of teaching my workforce to use the new technology of voice-mail. For years, the computers on most of the lawyers' desks might as well have been decorative fish tanks.
After many years, our practices and transactions have somehow landed over the rainbow. Now, most legal and business documents are electronic. The documents and communications are transmitted by computers and mobile phones.
Still, there were certain types of transactions I thought could never be done electronically. As with a long list of business and office technologies over the years, I was wrong. "Pay no attention to that man behind the curtain."
The flying monkeys of electronic promissory notes.
The good witches and wicked witches of IT nerds and lawyers have created "transferrable records" under the auspices of the Uniform Electronic Transactions Act ("UETA"). A transferrable record or electronic promissory note is something that would have been a promissory note under the law of negotiable instruments if it had been in writing. The issuer of this electronic promissory note needs to have expressly agreed that it is a transferrable record.
A paper promissory note actually embodies the payment obligation; there can only be one original. To enforce the obligation, the holder must have physical possession of the original promissory note. How do you replicate these qualities with an electronic document?
The rules for properly dealing with electronic promissory notes are complicated. For example, the requirement that the holder of a promissory note must have possession of the document has been replaced by the concept that a person must have "control" of the transferrable record to enforce the rights under the electronic promissory note.
The electronic promissory note must be unalterable. It must identify that the person seeking to enforce it was either the person to whom it was initially issued, or the most recent transferee. The electronic document must be "maintained" by the person claiming to "control" it, or its designee. How do you do all that? Use an "electronic vault!" The wizard behind the curtain seemingly controls the complexities of electronic promissory notes.
Only in the Emerald City could there be electronic notarizations.
In our modern-day Oz an "electronic signature" is defined as "an electronic sound, symbol, or process attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the electronic record."
So how can you possibly notarize an electronic signature under the terms of UETA? If a law requires a signature to be notarized or verified under oath, then UETA says that can happen electronically. To do that, "The electronic signature of the person … with all other information to be required to be included … [has to be] attached to or logically associated with the signature or record." Once the scarecrow gets his brain, he can explain to you what "logically associated" with an electronic signature means.
Clicking the heels of the ruby slippers will send you home with electronic wills and trusts.
I never thought the yellow brick road of change would lead to electronic wills or trusts. While only permitted by statutes in a few states, laws exist validating electronic wills and trusts. Such a law becomes effective in Arizona in 2019.
The laws of electronic wills and trusts essentially incorporate most of the definitions from UETA into the substantive laws governing transfers of assets upon the deaths of the testators under wills, or the settlors of trusts.
The fights among heirs over who is supposed to get what from the estates will only get more complicated and interesting. Which munchkins were disinherited by which electronic document?
Birds fly over the rainbow. Why then, oh why can't I?
To properly use all of the new electronic transactions in the new digital Oz you will need more than a scarecrow, a tin man and a lion. You will need both the good and wicked magic of IT nerds and lawyers!
Reprinted with permission.
Michael King is a founding member of Gammage & Burnham in Phoenix. His practice emphasizes creditors’ rights and construction issues, and also includes consulting and supervising throughout the firm’s areas of business. These include emphasis on creditors’ rights—bankruptcy cases, general litigation, loan documentation, workouts, foreclosures and forcible detainers—as well as deficiency collection and accounts collection. His client list includes banks, mortgage companies, distributors in various industries and leasing companies. He is experienced in handling large lawsuits involving complex legal issues from crop damage claims and construction litigation to sophisticated Uniform Commercial Code cases.
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