Chad Theriot and Brad Sands | Construction Executive
As modular construction techniques evolve and progress, so too do the legal proceedings surrounding them, from uniform commercial codes to common law to filing liens.
Modular construction has grown significantly over the last few years and shows no signs of slowing down. This construction method is a departure from traditional approaches where all construction activity occurs onsite. Modular construction involves building standardized project components—usually in an offsite, controlled environment—which are then transported and assembled at the project site. Offsite construction generally allows for better quality control and economic efficiency, as it can utilize an assembly-line process. Modular fabrication can also centralize skilled labor in regions with lower labor costs.
Establishing each party’s expectations upfront is always important, but even more so in modular construction since much of the construction activity is performed away from the ultimate project site. This requires extensive coordination among designers, fabricators, installers and owners to ensure construction, testing and quality progresses accordingly. Every field change and design clash could have an exponential impact on the modular fabrication efficiencies given the assembly-line approach and remote nature of modular work.
Few court decisions directly address the implications of constructing significant portions of a project away from the project site. There are unique legal issues that arise from modular construction, which differ from traditional onsite methods and must be considered on a state-by-state and case-by-case basis. These are a few of the many considerations to review before choosing a modular construction approach.
Does a module fabricator have the right to file a lien on a project if they are not paid?
A module fabricator’s right to file a lien depends on the specific text of the lien statute at issue. Liens are creatures of state-specific statutes and generally considered to be in derogation of the common law, meaning they alter the common law to create a new legal principle. As such, statutes involving liens are typically strictly construed in favor of the property owner and against those claiming a lien.
A fabricator will need to determine if the module fabrication work fits the definition of lienable work described in the lien statute. Additionally, a fabricator will need to determine its position in the chain of privity. For example, some lien statutes limit lien rights to those within certain tiers removed from the contract with the owner. In other words, if the fabricator is a sub-subcontractor to another subcontractor, the fabricator may not have the statutory right to claim a lien.
Are agreements with fabricators/manufacturers governed by the Uniform Commercial Code or common law?
There is no steadfast rule that a module fabrication contract must be governed by the UCC, because modular construction may combine both goods and services. UCC Article II applies only to transactions in goods. The UCC defines goods as being both both tangible and movable at the time of the transaction. This definition includes all things, including specially manufactured goods.
In determining whether a transaction is a sale of goods, courts consider whether the essence or dominant factor of the transaction is a sale of goods or services. This is also referred to as the predominant factor test. Each state has its own jurisprudence that outlines how courts apply the factors. Again, few if any court decisions directly address this nuanced point, although most indicators point to modules being treated as goods under the UCC.
How do the UCC and common law application differ?
Common law and the UCC often create different rights and obligations arising from the same contract terms. Whether the UCC or common law is applied to a module fabrication contract could result in completely different legal consequences. Some of these differences are further explained below.
Substantial compliance under common law versus the UCC’s perfect tender rule.
The doctrine of substantial compliance and the perfect tender rule represent two different standards for contract performance. The doctrine of substantial compliance under common law allows for minor deviations from the contract terms if the overall purpose of the contract is achieved.
In contrast, the UCC’s perfect tender rule requires complete performance, with the delivered goods conforming to the contract in every respect. This rule is stricter and does not allow for the concept of substantial performance. It is based on the premise that for transactions involving the sale of goods, the buyer has a right to receive exactly what was agreed upon in the contract.
UCC creates both express and implied warranties.
Warranties can differ depending on whether the contract is governed by the UCC or common law. In a UCC-governed contract, express warranties are created by any affirmation of fact or promise made by the seller to the buyer that relates to the goods and becomes part of the basis of the bargain. This creates an express warranty that the goods shall conform to the affirmation. The UCC also provides for implied warranties, which are obligations imposed and rights afforded by law that govern the transactions. In terms of breach, under the UCC, a breach of contract occurs when a party fails to deliver as promised, while a breach of warranty occurs when a seller delivers non-conforming goods.
On the other hand, in a construction contract governed by common law, there are typically no statutory warranties for nonresidential construction. However, an implied warranty that the construction will be performed in a good and workmanlike manner may arise under the common law when public policy mandates, but will otherwise generally not be justified when there are other adequate remedies at law.
Is there a standard modular form agreement?
Given the recent growth of modular construction, there are few standard form contracts offered. One example is ConsensusDocs’ 753 Standard Prefabricated Construction Agreement Between Constructor and Prefabricator. One feature of this form is a provision that allows the parties to select and agree “to the extent permitted by law” whether their contract is governed by common law or the UCC. This form provision highlights the current uncertainty regarding the applicable law—UCC or common law—for module-fabrication contracts.
Modular construction represents a significant shift in the traditional methods of building, offering numerous advantages such as enhanced quality control, cost savings and efficiency gains. However, its adoption necessitates a reevaluation of various legal considerations, particularly concerning lien rights, the application of the UCC versus common law and the divergent legal implications arising from these frameworks. As modular construction continues to reshape the industry landscape, proactive engagement with legal considerations is essential for stakeholders to capitalize on its benefits while mitigating potential risks.
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