By Bryce C. Reback, Attorney*
The construction industry is one that unsurprisingly is ever changing. Whether it be the laws governing the erection of new structures, or a sub-contractors rights under a contract, the industry has always been one to adapt. This is even more true as it pertains to technology on the job site. With the rise of automation and remote devices the landscape of construction projects has changed significantly.
Over the past several years there has been a lot of talk about the “future” of construction. What they are referencing is modular building. Since 2008 there has been literature popping up left and right about how modularization is going to rule the industry “soon” and that we better get ready or get left behind. Yet, if you look around at most any project, you will be met with good old fashion “stick built” construction projects. The thing is that while modularization has loads of potential there was never really any pressing need to change the way we physically conducted projects; well until COVID-19 that is.
“With quick turn arounds and pre-fabrications, the risk of running into a natural disaster or major event that substantially delays a project is minimized.”
To put it simply, modular construction is the integration and use of factory built “off-site” modular systems that are then transported by truck to the jobsite for installation. It seems simple enough, but until as of recently this was seen as the wave of the future and implemented sparsely in highly complex industrial builds. Thanks to COVID, in 2020 alone the construction industry adopted new techniques and technology in what would have normally taken three. Modular building brings with it a slough of attractive benefits. This includes increased productivity on site, fewer skill gaps and shortages, improved safety, more efficient/expedited scheduling, and lower costs to name a few. While these benefits are certainly appealing, they go hand in hand with a wealth of uncertainties. One of the biggest concerns and questions is how modular building effects the legal rights of those involved in a modular build project.
Modular building would essentially make force majeure provisions a fossil. With quick turn arounds and pre-fabrications, the risk of running into a natural disaster or major event that substantially delays a project is minimized. The other areas of construction law that may be affected are a lot less certain. The most pressing issue that comes to mind is what law would even cover disputes that involve modular builds?
Since modular construction projects and materials are a combination of both goods and services, a dispute concerning modular builders would require the evaluation and application of common law alongside Article 9 of the Uniform Commercial Code (UCC). While this precise issue has not been contemplated by the courts yet, there is some guidance in litigation that we will likely see much more of in the near future. For example, in State v. Bohne the Court recognized the general principle that modular homes are “goods” under the UCC until affixed to real property. In other cases contemplating goods and services contracts courts have applied the “predominant factor” test. The determination of which type of contract is “predominant” could greatly affect contractors’ rights. If found to be a goods contract, the UCC would apply and the modular builder would likely be classified a manufacturer. In the alternative, if the predominant reason for the contract is the service of building and constructing the prefabricated segments, the producer would likely be classified a subcontractor. The different classification would substantially change the contracts between the producer and contractor. For example, if a modular builder is considered a merchant under the UCC, the risk of loss would pass to the buyer upon receipt. Equally, if the modular builder is considered a subcontractor performing services, the risk of loss would pass to the buyer on tender of delivery. The allocation of risk of loss is something that buyers would need to keep in mind while drafting their contracts and would be another term that requiring consideration and negotiation.
An additional contract formation concern is the likely scenario in which a modular build would be produced in state A to then be transported and affixed in state B. The statute of limitations, statute of repose, indemnity clauses, and arbitration enforceability differ greatly from state to state. For example, for an indemnification provision to be enforceable in Texas there are strict guidelines that must be followed, including conspicuousness and complete informed assent (shown by an additional signature.) Contracting for these terms will require a deep analysis of each state’s laws as well as some creativity to make sure your individual interests are protected. An additional term that would likely becomes essential is the delivery of certificates of substantial or final completion. Many statutes of limitations begin ticking upon substantial completion and for that reason, modular contracts would need to expressly establish a protocol for when and how modules are to be received as well as the survey and inspection, and final acceptance procedures.
With the novelty of modular building and the speed with which it is being integrated into the industry we are bound to see litigation explode in the not-so-distant future. Until the law is settled and there are definitive answers to these questions be hyper vigilant about the applicable laws and risks you may be subjecting yourself to.