Modular Construction Project Survives Legal Challenge

October 18, 2016 Firm News

A Laurie & Brennan article featured in the Construction Law Corner Winter 2014 eNewsletter.

by Erin E. Krejci

Modular construction is a term used to describe the use of factory-made, pre-engineered building units that are delivered to and assembled on site, often as large components or as substantial elements of a building.   The use of modular, or prefabricated, construction techniques is on the rise, especially in the private housing, education, student residence, military housing, and health sectors.   Prefabricated construction methods are also making a mark in the sports sector — most notably, in connection with Quatar’s successful bid to host the FIFA World Cup 2022.

The increase in modular construction is often attributed to its claimed benefits.   One of the most frequently claimed benefits comes in the form of reduction in the time schedule of a project. Proponents tout modular construction as an effective building solution to speed up project schedules because building components are manufactured off-site, under controlled plant conditions, allowing work to be completed unhindered by weather or other environmental constraints.   In addition, the offsite process allows site preparation and component construction to occur simultaneously, rather than consecutively.   Proponents also claim that a key advantage of modular construction is that it is more cost effective than traditional on-site building.   Modular construction projects can take advantage of economies of scale by building a large number of similar pieces at the same time.   Prefabricated buildings are often regarded as less wasteful than other construction projects.   It is estimated that thirty to forty percent (30-40%) of the material used to construct a typical stick-built home ends up in a landfill, while the modular building process is estimated to result in only about two percent (2%) of materials ending up as landfill waste.

Though modular construction purports to have many benefits, it is not without controversy.   Indeed, critics of modular construction often cite labor issues as a disadvantage to modular construction.   Many of the jobs related to prefabricated construction are part-time and without benefits. In addition, because the projects are built in factories, even when using union labor, the jobs tend to be less skilled and thus lower paying.   Safety and quality are other concerns noted by critics because the applicability of existing construction codes and requirements to modular construction is largely untested.

The applicability of construction codes to modular construction has, however, been tested in New York City.   Recently, two trade unions filed a lawsuit challenging a modular construction project in Brooklyn.   Specifically, the trade groups claimed that the New York City Department of Buildings failed to properly apply construction code provisions that would require plumbing and fire suppression work to be conducted by Department of Building-licensed contractors.

The Project

The project at issue in the trade groups’ lawsuit is part of the Atlantic Yards — a mixed use commercial and residential project currently under construction in Brooklyn.   The first residential building at the Atlantic Yards is called B2 and is slated to be the world’s largest prefabricated tower.   Upon completion, it is projected to have 363 residential units and 4,000 square feet of retail space.   Construction workers are building the 930 modules in a Brooklyn Navy Yard factory.   On December 12, 2013, the first of the 930 steel modules was hoisted into place at B2.

The Lawsuit

In the summer of 2013, two licensed trade groups in New York City filed a lawsuit against the New York City’s Department of Buildings over its decision to exempt B2, the 32-story modular residential tower that is part of the Atlantic Yards development in Brooklyn, from construction code requirements.   Specifically, the Mechanical Contractors Association of New York Inc. and the Plumbing Foundation City of New York Inc. alleged that in an effort to help the developer of the modular tower, Forest City Ratner Cos., cut costs on the project, the Department of Buildings failed to properly apply Construction Code provisions that would require plumbing and fire suppression work to be conducted by Department of Building-licensed contractors.

The trade groups challenged the Department of Buildings April 3, 2013 Final Determination that the New York Administrative and Construction Codes’ requirement that the plumbing and fire suppression work be performed under the direct supervision of Department of Buildings-licensed master plumbers and fire suppression contractors does not apply to modular or prefabricated buildings.   The trade groups argued that the Department of Buildings ignored the plain language of the code by determining that the terms “plumbing or fire suppression” “do not apply” to plumbing or fire suppression work when such “work [is] done offsite prior to incorporation into a building or jobsite.”   The trade groups claimed that the Department of Building’s Final Determination was erroneous because the applicable codes do not include any geographic limitation — or any other limitation that would permit B2 to avoid code compliance.   The trade groups argued that allowing B2 to run afoul of the applicable codes had the potential to create an unsafe environment.   The trade groups sought to block work on B2 until the Department of Building’s properly enforced the applicable codes.

The Intervention

B2 Owners, the owner and developer of “B2” and FC+Skanska, the fabricators of the modules, sought to intervene in the trade groups’ lawsuit against the Department of Buildings.     Judge Eileen Rakower of the Supreme Court of the State of New York, New York County permitted the intervention, stating that B2, as the developer, and FC+Skanska, as the fabricator of the modules have concrete, substantial and direct interests in the outcome of the proceeding.

Oral Argument

On December 17, 2013, Judge Eileen A. Rakower heard oral argument on the trade groups’ challenge to the Department of Building’s Final Determination.   First, the oral argument addressed the preliminary issue of standing.   The trade associations argued that they deserved standing because they had a real interest at stake and that no one else could sue the Department of Buildings to ensure a safe process.   The Department of Justice opposed the trade associations’ arguments and suggested that neighbors and future tower residents might have standing to address any future issues that may arise.   Judge Rakower ultimately determined that the trade groups had standing to challenge the Department of Building’s Final Determination.

During oral argument, the trade groups claimed that this matter hinged on statutory interpretation.   The trade groups argued that in the event that the plumbing and fire suppression work was completed on site, the code would undeniably require licensed contractors.   The trade groups argued that the code cannot become obsolete by simply moving an identical scope of work from the job site to a factory.   Essentially, as argued by the trade groups, the code is the code — and the location of the work does not change the code’s requirements.

The Department of Buildings’ arguments put the term “deference” front and center.   The Department of Building’s argued that the Court should defer to agency discretion as long as the Department of Building’s acted rationally.   The Department of Building’s also argued that the location of the work matters and that a module is not a “building” for code purposes.   The Department of Buildings claimed that modular construction involves the manufacture of a “system” and that many systems, including water reclamation systems and fire pumps, are constructed offsite and not covered by the Code.

The Ruling

Though Judge Rakower heard approximately 70 minutes of oral argument, her ruling was terse.   After granting the trade groups standing, Judge Rakower dismissed the lawsuit initiated by the trade groups and stated that:

I also find that [the Department of Buildings] did not exceed its mandate in permitting the manufacture of these systems.

To date, Judge Rakower has not issued a written opinion nor provided additional details regarding her reasoning.

Despite its brevity, Judge Rakower’s dismissal of the lawsuit, does provide precedence for allowing future modular construction in New York City — perhaps even commercial buildings and hospitals.   The ruling may be a victory for the owners/developers, but it is probably not the last word on the applicability construction codes to modular construction.