Construction Law Issues Impacting Midstream Operators and Energy Producers in PA, WV and OH Webinar September 27, 2012 Topics Covered • Mechanics’ lien rights on natural gas pipeline construction projects. • Application of prompt payment statutes to contractor and subcontractor payment issues on natural gas pipeline construction projects. • Other state-specific statutes that may impact the legal rights of energy and midstream companies and their pipeline contractors . Mechanics’ Lien Rights in Pennsylvania PA Mechanics’ Lien Rights • Contractors and subcontractors can file mechanics’ liens to secure payment for services rendered. • Lien places an encumbrance against the owner’s real property for the unpaid balance of the work provided by the contractor or subcontractor. • May only file lien for work considered an “improvement.” • PA courts have not addressed whether natural gas construction activities (including well pad and pipeline construction) constitute an “improvement” under the PA Mechanics’ Lien Law. PA Mechanics’ Lien Rights Yellow Run Coal Co. v. Yellow Run Energy Co. • In 1979, the PA Superior Court held strip mining is not an improvement to real property under the Mechanics’ Lien Law. – Court differentiated from underground mining. – Strip mining only involves the excavation of top soil and coal; underground mining involves the erection and construction of permanent improvements such as shafts, tunnels, tramways, etc.. – With strip mining, no building or permanent structure is involved. Yellow Run Coal Co. • Court compared the definition of “improvement” under the current Mechanics’ Lien Law with the definition from the 1901 Mechanics’ Lien Law. – 1901 definition contained lengthy list of structures to which a lien would attach: • List included wells for production of gas or oil. – Current definition of “improvement” is more generic: • “building, structure, or other improvement of whatsoever kind or character erected or constructed on land.” Yellow Run Coal Co. • Court considered 1962 Joint State Government Commission Report which sponsored the revised Act: – More general definition was not intended to “abridge or enlarge the right to lien” by adopting a more generic definition of “improvement.” – 1901 detailed list was omitted as unnecessary. • Under this reasoning, it could be argued that that “structure or other improvement” in the current definition of “improvement” includes gas or oil wells. PA Mechanics’ Lien Rights • If PA courts are presented with issue of levying a Mechanics’ Lien on a natural gas shale well… – Courts may consider the definition of “improvement” under the statute along with the distinction drawn in Yellow Coal between strip mining and underground mining. – If so, Courts may conclude that because numerous gas producers have indicated that once a well reaches its economic life gas producers minimize the impact of the well’s prior existence, a shale gas well is not a permanent improvement, and therefore not lienable. PA Mechanics’ Lien Rights • Lien claimants may face an uphill battle in arguing that construction work associated with a gas well is a lienable improvement. • Natural gas pipeline is more likely to be deemed an “improvement” given its permanent nature, and therefore lienable in PA. – It is currently unclear whether the lien would attach to the fee simple interest of the owner of the real property at issue, or whether a lien claimant would be limited to attaching its lien to the leasehold and/or easement interest of the gas company. PA Mechanics’ Lien strategies • In construction contracts, require contractors to post payment bonds and agree to a blanket no-lien agreement which will prohibit subcontractor liens. – In PA, blanket no-lien agreements are only enforceable where a payment bond is posted. • Require partial lien waivers with each payment. • Issue joint checks if concerned about subs’ payments. • Consider potential liens when drafting leases and/or easement agreements: – Agree to indemnify landowners against lien claims to protect rights under leases and/or easements. – Do not want to cloud title. Mechanics’ Lien Rights in West Virginia WV Mechanics’ Lien Rights • WV Mechanics’ Lien Law grants any “person, firm or corporation” a lien against the constructed structure or improvement for an unpaid balance under the construction contract. – Range of entities eligible to assert a lien is expansive: • General Contractors • Subcontractors • Material suppliers • Engineers • Laborers • General Contractors and two tiers of subs and suppliers. WV Mechanics’ Lien Rights • Lien law encompasses a wide range of activities, including “construction of any building or other structure or other improvement appurtenant to any such building or other structure.” • There is no statutory provision or recent case law in WV that expressly extends the lien law’s inclusive language to shale well construction activities. WV Mechanics’ Lien Rights Kanawha Oil & Gas Co. v. Wenner • In 1912, the WV Supreme Court considered whether a contractor could assert a lien against and oil and gas developer-lessee for the construction of a well producing oil and gas. • Court held that “an oil and gas well is a “structure’” within the meaning of WV’s lien law from 1906, and hence is “subject to a mechanic’s lien.” – 1906 version included any “building, appurtenances, fixtures, bridge, or other structure”, containing broad language similar to the current law. Strategies re WV Mechanics’ Liens • The similarity in breadth of the current law to the defunct law considered by the Kanawha Court makes it likely that WV courts would interpret the statute as covering natural gas construction activities. • WV Lien Law is silent on up-front waivers: – A “clear and unequivocal” waiver should be enforceable. – Ensure that GC has a contractual obligation to provide for waivers by its subs and suppliers. Mechanics’ Lien Rights in Ohio OH Mechanics’ Lien Rights To achieve perfection of a mechanics’ lien upon private improvements to real property: Owner(s) must: 1. Prepare and record a “notice of commencement” prior to commencement of the project; 2. Post a copy of the notice on the project site; and 3. Make the notice readily available to contractors, subcontractors and material suppliers. OH Mechanics’ Lien Rights Subcontractors or material suppliers must serve a “notice of furnishing” on the owner within 21 days of commencing work or supplying materials • Contractors and material suppliers which are in direct privity with the owner are not required to serve a notice of furnishing OH Mechanics’ Lien Rights • Once non-payment issues arise, a mechanic’s lien affidavit must – Be prepared and contain certain information as required under the statute; – Be filed for recording within 75 days of the last work performed or material furnished; and – Be served upon the owner within 30 days after filing the affidavit. OH Mechanics’ Lien Rights • Ohio’s Mechanics’ Lien Law has a specific section addressing work associated with oil and gas wells, and adjusts the private improvement perfection requirements by: – Removing the notice of commencement requirement for owners; – Removing the notice of furnishing requirement for subcontractors; and – Extending the time allotted for recording the lien affidavit from 75 days to 120 days from the last work performed or material furnished. OH Mechanics’ Lien Rights • Every contractor who performs work or furnishes material pursuant to a contract with a property owner (and every subcontractor and material supplier who perform work or supply materials to complete the project) has the right to file a mechanic’s lien to secure payment for costs associated with: • “digging, drilling, boring, operating, completing, or repairing” – Any well drilled or constructed for the production of oil or gas; or – Any injection well which furthers the production of oil and gas or which disposes of waste products generated by oil and gas operations • Altering, repairing, or constructing any oil derrick, oil tank, or leasehold production pipeline. OH Mechanics’ Lien Rights Perfected liens can be attached to: 1. The oil and gas lease or leasehold estate (or if there is no oil and gas lease or leasehold estate, any mineral estate); 2. The oil or gas produced from the lease and the proceeds thereof (provided that a lien against the proceeds is not effective against any purchaser or pipeline carrier of the oil or gas until an affidavit is delivered to such purchaser or carrier by certified mail); and 3. All material located on the leasehold property or used in connection therewith. Ohio Mechanics’ Lien Strategies • Despite breadth of lien rights on gas projects, construction of an access road to reach a well site is presumably not included within the scope of Section 1311.021. • Subcontractors may not comply with notice requirements. • Consider a contractual provision to permit withholding final retainage for 120 days to protect against liens. State Payment Statutes PA Contractor & Subcontractor Payment Act, 73 Pa. Cons. Stat. §501, et seq. • Provides contractors and subcontractors with a remedy if they have not been promptly paid for services rendered under a construction contract. – Under CASPA, “construction contract” is defined as “any agreement whether written or oral, to perform work on any real property located within this Commonwealth.” • Once a construction contract is entered, owners must pay contractors strictly in accordance with the terms of that contract – If payment obligations crated by the contract are not met, PA courts may award the contractor interest (1%/month), along with penalty fees (1%/month) and attorneys’ fees to the substantially prevailing party for any amounts wrongfully withheld. Ohio Prompt Payment Act Ohio Rev. Code Ann. §4113.61, et seq. • Requires contractors to make payments to subcontractors and materials suppliers within 10 calendar days after receipt of payment from the owner, provided subcontractors and material suppliers make timely requests for payment. • Failure by contractors to make such payment subjects contractors to the following: – Penalty in an amount equal to the full amount due plus interest at 18% per annum. – Attorneys’ fees if a civil action is commenced (unless such an award is found to be inequitable). – Court costs. Ohio Prompt Payment Act • Contractors are permitted to reduce the amount of the payment by any retainage provision in the contract between the contractor and the subcontractor or material supplier. Ohio Prompt Payment Act • Contractors are permitted to withhold amounts that may be necessary to resolve certain disputed liens or claims. – Limited to amounts related to the work or labor performed or materials furnished by the subcontractor or material supplier – Ohio courts have held that contractor’s withholding of estimated costs of securing a lien substitute (bond premium and attorney's fees directly related to a subcontractor’s breach) was impermissible because such withholding was not result of “disputed liens or claims involving the work or labor performed or materials finished by the subcontractor. Unique State Statutes Impacting Natural Gas Construction Work State Statutes Impacting Natural Gas Construction Work • Most states are responding to the increase in natural gas pipeline construction by enacting pipeline construction regulations containing technical standards for the design and construction of pipelines. – Minimum requirements are set forth in the federal regulations, 49 C.F.R. 192 – State regulations include: • W.V. Code §24B-2-1 • Pennsylvania Gas and Hazardous Liquids Pipeline Act (Act 127) (2011) • Ohio S.B. 315 (2012) State Statutes Impacting Natural Gas Construction Work • State agencies administering these guidelines retain the authority to impose more stringent construction requirements for intrastate pipelines, as well as the ability to order work cessation or levy fines up to $1,000 per day of noncompliance. • State agencies include: – Pennsylvania Public Utilities Commission – Public Service Commission of West Virginia – Public Utilities Commission of Ohio Ohio S.B. 315 Ohio S.B. 315 – Enacted June 11, 2012 – Creates a siting review procedure administered by the Power Siting Board (PSB) of the Public Utilities Commission of Ohio Ohio S.B. 315 • “Major Utility Facilities,” including pipelines greater than 500 feet in length, 9 inches in diameter, and operating with a maximum allowable operating pressure in excess of 125 psi, must apply for a construction certificate prior to beginning the project. – Gathering lines conveying gas from a production facility to a transmission line are not treated as “major utility facilities” and are exempt from siting review. – Pipelines less than five miles in length may proceed under an “accelerated” review process. Ohio S.B. 315 • PSB is only authorized to grant a construction certificate after considering the need for the pipeline, that nature and minimization of adverse environmental effects, the impact on agricultural lands, and consistency with the public interest. • Review process could take up to 90 days. PA Regulations • Act 127 permits the PA PUC to enforce the federal regulations. • PA Oil and Gas Act (Act 13) – limitations on local ordinances, which must permit “reasonable development of oil and gas” • Chapter 78 – Draft regulations from PA DEP regarding environmental impacts caused by inadvertent returns during horizontal direction drilling. WV Indemnity Statute • WV Code §55-8-14 provides, in part, that a promise in an agreement relating to the construction, alteration or repair of a “gas distribution system” to indemnify against liability for bodily injury or property damage caused by the sole negligence of the indemnitee is void. • Clearly applies to gas pipelines and is a different standard than in nearby states. • Does not apply to insurance contracts – the statute does not intend to limit insurance coverage. Construction Contract Provisions Ohio’s Fairness in Construction Contracting Act • Makes void and unenforceable as against public policy contractual provisions which are routinely found in construction contracts. – Provisions which waive rights under a surety bond. – Provisions which waives pending or asserted claims when final payment is received. – Provisions which waives or precludes liability for delay, or waives any other remedy for delay when the delay results from owner or contractor’s act or failure to act. – When included in a contract for improvement of real estate in Ohio which (a) makes the contract subject to the laws of another state, or (b) requires litigation, arbitration or other dispute resolution process to occur in another state. – When included in a contract which conditions payment upon receipt of payment, prohibits the protection of rights against a surety bond or through the filing of a mechanic’s lien. PA PASPA CASPA states: Making a contract subject to the laws of another state or requiring that any litigation, arbitration or other dispute resolution process on the contract occur in another state, shall be unenforceable. Possible Strategic Solution • The purpose of the Federal Arbitration Act (“FAA”) is “to ensure that private agreements to arbitrate are enforced according to their terms.” • If application of a certain states law will cause the arbitration clause to be unenforceable, the FAA preempts that state law to render it unenforceable. • May be able to include choice of law and choice of venue provision in an FAA arbitration clause to compel arbitration in desired venue with desired choice of law. (Note – this issue is not settled.) Questions???