TENDERING UNDISPUTED SUMS TO CUT OFF ACCRUAL OF INTEREST

Posted on October 17, 2015October 17, 2015 by Edward Garber

Disputes over the quantum of money owed are not uncommon. For instance, say a subcontractor claims it is owed $500,000 from the general contractor and the general contractor disputes this amount. Say that of this $500,000, $300,000 is undisputed contract balance and $200,000 is disputed change orders. In this situation, what should the general contractor do?

The issue in this hypothetical is the $300,000 in undisputed contract balance. I am a strong believer in paying or tendering undisputed amounts so that the dispute is confined to the issues and amounts actually disputed between the parties.

Why tender undisputed funds? An appropriate tender is a tender of money without any conditions tied to the depositing of the money; the tender must be absolute and unconditional. See James A. Cummings, Inc. v. Young, 589 So.2d 950,955 (Fla. 3d DCA 1991) (finding that a written proposal to pay money after litigation commenced does not constitute a tender and a tender cannot include conditions on the money).

The check should be cash or a cashier’s check and should include interest on the undisputed money owed. “[T]he tender of a mere check does not constitute payment of cash or its equivalent and it thus makes such a tender of payment merely conditional.” See Enriquillo Export & Import, Inc. v. M.B.R. Industries, Inc., 733 So.2d 1124, 1127 (Fla. 4^th DCA 1999).

The objective of the tender is to relieve the paying party from any subsequent accrual of interest owed on the money. See Morton v. Ansin, 129 So.2d 177, 182 (Fla. 3d DCA 1961); see also Ismark v. W.G.Mills, Inc., 899 So.2d 1213 (Fla. 2d DCA 2005) (“[A] tender of sums due on a date certain under a contract will stop the accrual of prejudgment interest only when the tender is absolute and unconditional.”). The effect of an appropriate tender is to cut off additional interest owed on the money from the date of the tender.

“A tender of less than the full amount due, however, is insufficient. Thus, if the amount of the tender does not include the interest to which a creditor is entitled, the tender is nugatory.” Dade County v. American Re-Insurance Co., 467 So.2d 414 (Fla. 3d DCA 1985) (internal citations omitted) (finding that tender was insufficient since it failed to include interest due on owed amount).

There is authority that a party can tender a disputed or protested amount as long as there are no conditions tied to the depositing of the money. See Gascoyne v. Bay Towne Property Owners Ass’n, Inc., 575 So.2d 671, 672 (Fla. 2d DCA 1991) (“A tender under protest will only be conditional if acceptance is predicated on the recipient being required to take some action.”). The reason to do this would be to cut off the accrual of interest on the money. However, in my opinion, tendering protested or disputed amounts should be carefully done to avoid the appearance that it is indeed a conditional payment or an insincere tender.

Whether to tender money should ideally be done under the guidance of your attorney. And, if a tender is considered, it is important that it is done properly so that you get the value of the reason for the tender–to cut off the accrual of interest.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

A LETTER OF INTENT CAN FORM THE BASIS OF AN ENFORCEABLE CONTRACT

Posted on December 2, 2014December 2, 2014 by Edward Garber

Just because there is not an executed subcontract, does not mean there is not an enforceable written contract between a contractor and subcontractor. While it is good practice for there to be an executed contract in place, this does not always occur. But, this lack of occurrence does not necessarily mean a performing subcontractor can escape contractual obligations merely because it never signed the subcontract. Indeed, many times a subcontractor starts performing based on a letter of intent that it received from the contractor. The letter of intent may indicate that a formal subcontract will be furnished to the subcontractor such as when the contractor is awarded the project or after the subcontractor starts performing under the letter of intent. If the subcontractor starts performing based on the letter of intent that it received, this letter of intent can certainly form the basis of an enforceable contract!

The decision in Sealevel Construction, Inc. v. Westcoast Corp., 2014 WL 3587264 (E.D.La. 2014) exemplifies how a letter of intent can form the basis of a written contract. Here, a subcontractor on a federal project solicited bids from sub-subcontractors to perform aspects of its work based on the plans and specifications for the project. The specifications, among other things, contained a liquidated damages section. A sub-subcontractor submitted a bid to install concrete piles. The subcontractor accepted the bid and issued the sub-subcontractor a letter of intent. The letter of intent was signed by both the subcontractor and sub-subcontractor and referenced the specifications. The letter of intent further stated that a formal subcontract would be entered between the parties; however, a subcontract was never executed.

The sub-subcontractor started to perform its scope of piling work based on the letter of intent. Thereafter, the subcontractor notified the sub-subcontractor of delays with the sub-subcontractor’s scope of work. The sub-subcontractor was unable to cure the delays and the subcontractor hired another entity to supplement its sub-subcontractor’s work. Nevertheless, as a result of delays to the sub-subcontractor’s scope of work, the government assessed liquidated damages against the prime contractor. The prime contractor, in turn, withheld the amount of the liquidated damages from the subcontractor in addition to the prime contractor’s own extended general conditions. The subcontractor then withheld this money from its sub-subcontractor in addition to its own extended general conditions.

The Eastern District of Louisiana found that the letter of intent served as an enforceable contract between the subcontractor and sub-subcontractor and the sub-subcontractor breached the letter of intent through its delayed performance. As a result, the subcontractor was entitled to withhold / back-charge the sub-subcontractor for (i) the costs spent on the supplemental entity to mitigate the sub-subcontractor’s delay and (ii) the portion of liquidated damages attributable to the sub-subcontractor’s delay. The court did not, however, allow the subcontractor to back-charge the sub-subcontractor for other delay-related costs (such as the prime contractor’s and the subcontractor’s extended general conditions) since the sub-subcontractor never contractually agreed to these types of damages unlike the liquidated damages section that was included in the specifications referenced in the letter of intent.

Take-aways:

If a letter of intent is issued, the letter of intent should identify the subcontract amount, the applicable scope of work, and reference the plans and specifications. The more detail in the letter of intent the better so that if the subcontractor starts performing based on the letter of intent there is a strong argument that the detailed letter of intent served as the contract between the parties (such as if the subcontractor refuses to sign the subcontract, the parties are unable to agree on the formal written subcontract, or if the subcontract is never issued).

It is good practice to have both the contractor and subcontractor sign the letter of intent.

An unexecuted contract does not mean there is not a written contract between the parties. Parties need to consider this before taking an extreme position that a contract does not exist or that they are not bound by certain requirements.

It is good practice for a party subcontracting work to be able to flow-down damages such as liquidated damages and their own extended general conditions. In this case, the subcontractor would have been able to flow-down the prime contractor’s and its extended general conditions attributable to the sub-subcontractor’s delay had this been identified in the letter of intent or clarified by an executed written subcontract.

FEDERAL GOVERNMENT CONTRACTING AND RECOVERY OF ATTORNEY’S FEES UNDER THE EQUAL ACCESS TO JUSTICE ACT (“EAJA”)

Posted on November 1, 2014November 1, 2014 by Edward Garber

The ability to recover attorney’s fees against the federal government is a consideration before initiating a dispute against the government, whether in federal court or in an administrative proceeding.

The Equal Access to Justice Act (referred to as the “EAJA”) authorizes a court to award reasonable attorney’s fees and costs to a prevailing, eligible contractor in an action brought by or against the United States. 28 U.S.C. s. 2412(d)(1)(a). The purpose of the EAJA has been explained as follows:

“The purpose of the EAJA is to eliminate legal expenses as a barrier to challenges of unreasonable government action. Accordingly, the EAJA authorizes this court to award attorney fees and expenses incurred by contractors who prevail in litigation against the government provided the contractors do not exceed certain size and net worth limitations. The government may escape liability for legal expenses if its actions were substantially justified or if special circumstances make the award unjust. The burden is on the government to present a substantial justification for its actions.”

Community Heating & Plumbing Co., Inc. v. Garrett, 2 F.3d 1143, 1145 (Fed.Cir. 1993) (internal citations and quotations omitted)

First, the contractor needs to be eligible to recover fees under the EAJA. Not every contractor is eligible. Such eligible contractors are defined by the EAJA as:

“(i) an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed, or (ii) any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, the net worth of which did not exceed $7,000,000 at the time the civil action was filed, and which had not more than 500 employees at the time the civil action was filed….”

28 U.S.C. 2412 (d)(2)(B)

Second, the contractor needs to be the prevailing party. A prevailing contractor under the EAJA is a contractor that recovers a judgment on the merits in its favor. Ulysses, Inc. v. U.S., 117 Fed.Cl. 772, 777 (Fed.Cl. 2014). The government however, can avoid the award of fees against it if it proves it was substantially justified in advancing its position. Substantial justification is a subjective standard determined on a case-by-case basis:

“In determining whether to award attorney’s fees under EAJA, the Court looks to whether the Government’s position prior to and throughout litigation had a reasonable basis in both law and fact. While the appropriateness of the Government’s position might vary on individual matters, the Court considers the totality of circumstances to determine whether that position was substantially justified. In the words of the United States Supreme Court, ‘While the parties’ postures on individual matters may be more or less justified, the EAJA … favors treating a case as an inclusive whole, rather than as atomized line-items.’”

Ulysses, 117 Fed.Cl. at 778 (internal quotations and citations omitted).

Stated more simplistically, the government must prove that it advanced a position “justified to a degree that could satisfy a reasonable person.” BCPeabody Construction Services, Inc. v. U.S., 117 Fed.Cl. 408, 413 (Fed.Cl. 2014) (internal quotation and citation omitted).

And third, even if the contractor is eligible to recover attorney’s fees under the EAJA and prevails against the government, this does NOT mean that it will recover 100% of the fees it incurred in the action. The EAJA provides a statutory cap of $125/hour for attorney’s fees time unless the “court determines that an increase in the cost of living or a special factor, such as the limited availability of qualified attorneys or the proceedings involved, justifies a higher fee.” 28 U.S.C. s. 2412(d)(2)(A). Unfortunately, exceeding this hourly cap has nothing to do with the novelty of the issues, the competence of the attorney, or the results obtained. BCPeadbody Construction Services, 117 Fed.Cl. at 415. This means that contractors should not bank on exceeding the statutory cap in recovering attorney’s fees against the government.

Importantly, there is also a relevant EAJA for administrative proceedings initiated prior to or instead of any civil action in court. 5 U.S.C. s. 504. This administrative EAJA largely mirrors the EAJA discussed above for civil actions, but applies to administrative proceedings. See Melkonyan v. Sullivan, 501 U.S. 89 (1991).

Before proceeding with a dispute against the federal government in federal court or an administrative proceeding, consider whether you have a basis under the EAJA to recover attorney’s fees.

MILLER ACT AND TIMELY SERVING NOTICE OF NON-PAYMENT WITHIN 90 DAYS OF LAST FURNISHING

Posted on October 30, 2014October 30, 2014 by Edward Garber

Federal district courts interpreting the Miller Act provide value to those prime contractors, subcontractors, suppliers, and sub-subcontractors that work on federal construction projects, even if the decisions and projects are outside of Florida.

Remember, the Miller Act requires sub-subcontractors and suppliers in direct contract with a subcontractor but that have no contractual relationship with the prime contractor to serve a notice of non-payment to the prime contractor within 90 days from their last furnishing of labor or materials to the subcontractor. Failure to provide this notice will result in a very strong defense from the prime contractor and surety that the supplier or sub-subcontractor has NO Miller Act payment bond rights. Do not…let me repeat, do not…put yourself in this position if you are a supplier or sub-subcontractor on a federal project. And, if you are a prime contractor or surety defending a Miller Act payment bond claim from a sub-subcontractor or supplier, analyze whether the claimant timely served its notice of non-payment within 90 days from its last furnishing to the subcontractor.

For example, in U.S. ex rel. Sun Coast Contracting Services, LLC v. DQSI, LLC, 2014 WL 5431373 (M.D.La. 2014), a sub-subcontractor initiated a Miller Act payment bond claim. But–and this is a big but–the sub-subcontractor could not dispute the fact that it independently failed to serve a notice of non-payment within 90 days from its last furnishing to the subcontractor that hired it. Instead, the sub-subcontractor argued that a notice of non-payment from the subcontractor to the prime contractor served as its notice since it included amounts the subcontractor owed to it. Yet, the letter that the sub-subcontractor relied on never mentioned the sub-subcontractor or the amount the subcontractor owed to the sub-subcontractor. Therefore, it was easy for the federal district court to conclude that the sub-subcontractor had NO Miller Act payment bond rights:

Beyond SCCS’s [subcontractors] letter, whose content did not even allude to the existence of a claim by Plaintiff [sub-subcontractor], Plaintiff has not put forth any assertion that it communicated its claim to DQSI [prime contractor] within ninety days after the date of Plaintiffs last performance on the project. By failing to provide proper notice according to statutory requirements, Plaintiff has no right to sue Defendants DQSI or Western Surety under the Miller Act.

Sun Coast Contracting Services, LLC, supra, at *4.

While federal courts liberally construe the method of service of the notice of non-payment from the supplier or sub-subcontractor to the prime contractor, it really should never get to this point as it simply gives the prime contractor and surety a legitimate defense to a Miller Act claim. If you are a supplier or sub-subcontractor, do NOT deal with this unnecessary headache. Properly preserve your Miller Act payment bond rights. On the other hand, if you are a prime contractor or surety, you should absolutely explore whether the Miller Act payment bond claimant properly preserved its payment bond rights and, if not, defend the claim based on this failure.

THE CONTRACTUAL RIGHT TO ARBITRATE CAN BE WAIVED

Posted on October 24, 2014October 24, 2014 by Edward Garber

Arbitration is a form of dispute resolution that emanates from your contract. Hence, if your contract requires arbitration, then arbitration, as opposed to litigation, is the method of dispute resolution. But, the contractual right to arbitrate can be waived if a party actively participates in litigation or takes a position in litigation that is wholly inconsistent with their contractual right to arbitrate. Remember, if you negotiated arbitration as the form of dispute resolution in your contract, and you want to arbitrate a dispute, then take action consistent with this right. Otherwise, you risk waiving this contractual right to arbitrate—a right that you negotiated on the front-end in your contract.

However, just because you file a lawsuit or counterclaim does not mean that you automatically waive your right to arbitration. The key is that if you want to arbitrate to file a motion to compel arbitration simultaneously with the lawsuit / counterclaim moving the court to compel the dispute to arbitration pursuant to an arbitration provision in your contract. For instance, in Andre Franklin, Inc. v. Wax, 2014 WL 5002130 (Fla. 2d DCA 2014), a contractor recorded a lien on a residential project prompting the owner to file a lawsuit against the contractor to, among other things, discharge the construction lien. The contractor filed a counterclaim moving to foreclose the lien and for breach of contract and simultaneously moved to compel arbitration; the contractor also moved to dismiss or abate the lawsuit. At a hearing, the trial court granted the motion to dismiss and allowed the owner to amend the complaint. When the owner amended the complaint, the contractor renewed its motion to compel arbitration and simultaneously answered the amended complaint. The owner argued that the contractor waived the right to arbitrate by filing the counterclaim and arguing the motion to dismiss and abate; the trial court agreed.

On appeal, the Second District held that the contractor never waived its right to arbitration. The Second District explained:

A party may waive its contractual right to arbitrate by actively participating in a lawsuit or taking action inconsistent with that right.

***

[But,] we conclude that Franklin [contractor] did not waive its contractual right to arbitrate by filing a counterclaim simultaneously with its motion to compel arbitration, motion to dismiss, and motion to abate. Franklin did not implement discovery. Franklin’s filing of the counterclaims and motion to dismiss at the same time as a motion to compel arbitration is filed, without more, does not waive the contractual right to arbitrate.

Andre Franklin, Inc., supra, at *1, 2.

LEARNING THE TRICKS OF THE TRADE / NUANCES UNDER FLORIDA’S LIEN LAW

Posted on October 23, 2014October 23, 2014 by Edward Garber

It is advantageous for all construction participants / lienors in Florida (e.g., owner, contractor, subcontractor, supplier, design professional) to learn the nuances under Florida’s Lien Law (and, in actuality, in any state the lienor performs work in). This way, the lienor can learn the tricks of the trade in order to put them in the best position possible to protect their interests under the lien law.

For instance, under Florida Statute s. 713.165 (set forth at the bottom of this posting), there is a trick of the trade that allows an owner to formally request from its contractor a list of the subcontractors and suppliers the contractor hired. “If the contractor fails to furnish the list, the contractor thereby forfeits the contractor’s right to assert a lien against the owner’s property to the extent the owner is prejudiced by the contractor’s failure to furnish the list or by any omissions from the list.” Fla. Stat. s. 713.165(2). Sure, it may be difficult for an owner to establish how it was “prejudiced” by the contractor’s failure to timely provide the list of subcontractors and suppliers (it would be an argument established on a case-by-case basis), it is still a defense to the contractor’s lien action that an owner can legitimately raise if the list is not timely furnished. And, from the contractor’s perspective, there is no reason to even deal with the risk that the trier of fact found it prejudicial that the list was not timely provided.

Further, under Florida Statute s. 713.16(1) (material portion set forth at the bottom of this posting), an owner can request from a lienor a copy that lienor’s contract. Likewise, the lienor can request a copy of the owner’s contract with the general contractor as well as a copy of the contract between the lienor’s customer and the customer’s customer. See 8 Fla.Prac., Constr. Law Manual s. 8:32 (2013-2014 ed.) (explaining application of s. 713.16). “For example, a sub-subcontractor can lawfully request a copy of the direct contract between the owner and the [general] contractor, as well as a copy of the contract between the subcontractor (sub-subcontractor’s customer) and the contractor (sub-subcontractor’s customer’s customer).” See id. “If the owner or lienor refuses or neglects to furnish such copy of the contract…any person who suffers any detriment thereby has a cause of action against the person refusing or neglecting to furnish the same…for his or her damages sustained thereby.” Fla. Stat. s.713.16(1).

As exemplified, there are tricks of the trade under Florida’s Lien Law that an unwary construction participant / lienor could fall trap to. This would apply to any state the lienor is performing work in. Don’t fall trap to the nuances of the lien law or tricks of the trade! Spend the time to understand the nuances and utilize the services of a knowledgeable construction attorney that will help you navigate around the lien law to best protect your interests!

Florida Statute s. 713.165:

(1) An owner of real property may request from the contractor a list of all subcontractors and suppliers who have any contract with the contractor to furnish any material or to perform any service for the contractor with respect to the owner’s real property or improvement to the real property. The request must be in writing and delivered by registered or certified mail to the address of the contractor shown in the contract or the recorded notice of commencement.

(2) The contractor must within 10 days after receipt of the property owner’s written request, furnish to the property owner or the property owner’s agent a list of the subcontractors and suppliers who have a contract with the contractor as of the date the request is received by the contractor. If the contractor fails to furnish the list, the contractor thereby forfeits the contractor’s right to assert a lien against the owner’s property to the extent the owner is prejudiced by the contractor’s failure to furnish the list or by any omissions from the list.

(3) A list furnished under this section shall not constitute a notice to owner.

Florida Statute s. 713.16(1):

(1) A copy of the contract of a lienor or owner…must be furnished by any party thereto, upon written demand of an owner or a lienor contracting with or employed by the other party to such contract. If the owner or lienor refuses or neglects to furnish such copy of the contract…any person who suffers any detriment thereby has a cause of action against the person refusing or neglecting to furnish the same…for his or her damages sustained thereby. …The person demanding such documents must pay for the reproduction thereof; and, if such person fails or refuses to do so, he or she is entitled only to inspect such documents at reasonable times and places.

MILLER ACT TIME

Posted on October 11, 2014October 11, 2014 by Edward Garber

If you are a subcontractor or a sub-subcontractor / supplier in direct privity of contract with a subcontractor on a federal project, you NEED to know your Miller Act payment bond rights. Why? Because the payment bond is designed to protect YOUR interests as a mechanism to insure non-payment.

Sub-subcontractors and suppliers in direct privity of contract with a subcontractor MUST serve the prime contractor within 90 days of their final furnishing date a notice of non-payment stating “with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed [e.g., the subcontractor].” 40 USC 3133(b)(2). Please do not neglect this all-important initial step in preserving a Miller Act payment bond claim. The notice should be served from the final furnishing of labor or materials exclusive of punchlist or warranty / corrective work. (Notably, subcontractors in direct privity of contract with the prime contractor do not need to serve this notice of non-payment on the prime contractor.)

In U.S. f/u/b/o Butler Supply, Inc. v. Power & Data, LLC, 2014 WL 4913421 (E.D.Miss. 2014), a supplier furnished electrical materials to an electrical subcontractor working on a federal project. Due to non-payment, the supplier sued the prime contractor’s Miller Act payment bond. The prime contractor argued that the supplier is not a valid Miller Act payment bond claimant because it did not have a direct contract with the supplier. The federal district court dismissed this argument because the electrical subcontractor signed a credit application and corresponding personal guaranty that served as the basis of a direct contract between the supplier and subcontractor. To this point, the federal district court expressed, “[S]eparate order of materials under an open account or credit basis, typically represented in purchase orders or invoices, satisfy the [Miller] Act’s underlying contract requirement.” Butler Supply, supra, at *3.

Next, the prime contractor argued that the supplier did not timely serve its written notice of non-payment within 90-days of final furnishing because the supplier could not prove that the materials were delivered to the job. The federal district court dismissed this argument too since actual delivery or incorporation of materials into a federal project is immaterial with respect to a supplier’s Miller Act rights. What is material is the “supplier’s good faith belief that the materials were intended for the specified work [project].” Butler Supply, supra, at *4 (internal quotation and citation omitted). In this instance, the supplier submitted invoices showing the material furnished, the price of the material, the name and location of the project, and delivery tickets showing the materials were signed by the subcontractor.

In Butler Supply, the federal district court granted summary judgment in favor of the supplier’s Miller Act claims dismissing the prime contractor’s arguments. Although this ruling it outside of Florida, the same result should be achieved in a Miller Act suit in Florida. The key is to (a) establish a direct contractual relationship with a subcontractor and (b) establish your final furnishing date with documentary evidence (since you can expect the prime contractor to challenge the timeliness of the written notice of non-payment). In Butler Supply, the supplier relied on a credit application (and subsequently submitted invoices), which is a routine document required by suppliers, especially suppliers that furnish material on credit or through an open account. And, the supplier relied on invoices and delivery tickets reflecting its final furnishing date and that it had a good faith belief the materials furnished would be utilized on the project.

CONVERTING THE DREADFUL TERMINATION FOR DEFAULT INTO A TERMINATION FOR CONVENIENCE

Posted on October 5, 2014October 5, 2014 by Edward Garber

Contractors, whether prime contractors or subcontractors, terminated for default (also known as termination for cause) want to convert that termination for default into a termination for convenience. The termination for default ultimately means the contractor materially breached the contract and would be liable for any cost overrun associated with completing their contractual scope of work. On the other hand, if the termination for default is converted into a termination for convenience, the contractor would be entitled to get paid for the work performed through the termination along with reasonable profit on the work performed and, depending on the contract, reasonable anticipatory profit on the work NOT performed. A huge difference and the fundamental reason contractors terminated for default should aim to convert that termination for default into a termination for convenience!

Under the Federal Acquisition Regulations, contractors terminated for convenience may recover reasonable profit on work performed, but NOT profit for work not performed. (See F.A.R. s. 52.249-2 and 49.202)

But, under the standard AIA A201 General Conditions, if an owner terminates a general contractor for convenience, “the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.” (See AIA A201, para. 14.4.3)

Yet, under the ConsensusDocs 200, “If the Owner terminates this Agreement for Convenience, the Constructor shall be paid: (a) for the Work performed to date including Overhead and profit; and (b) for all demobilization costs and costs incurred as a result of the termination but not including Overhead or profit on Work not performed.” (See Consensus Docs, 200, para. 11.4.2)

As reflected above, a contractual provision will dictate the costs recoverable when there is a termination for convenience. The AIA A201 General Conditions is favorable to a contractor by providing for reasonable overhead and profit on the work not executed. Whether reasonable profit on work not performed is recoverable, the objective should always be converting that termination for default into one for convenience so that at least the contractor can recover for work performed and profit on the work performed along with other associated termination costs that the contract may provide.

When a party is terminated for default, the key issues that will arise will typically be: (a) whether the termination for default was proper, i.e., whether the terminating party procedurally complied with the termination for default provision in the contract, (b) whether the cause or default was material and rose to the level of constituting a default termination, and (c) converting the termination for default into a termination for convenience and the recoverable costs pursuant to the termination for convenience provision in the contract. Again, a termination for default will likely mean that the terminated party owes the terminating party money associated with the overrun for completing their scope of work. A termination for convenience, on the other hand, will likely mean that the terminated party is owed money for work it performed irrespective of any overrun experienced by the terminating party.

A recent ruling in U.S.A. f/u/b/o Ragghianti Foundations III, LLC v. Peter R. Brown Construction, Inc., 2014 WL 4791999 (M.D.Fla. 2014), illustrates a dispute between a prime contractor and a subcontractor on a federal project after the prime contractor default terminated the subcontractor. The prime contractor hired a subcontractor to construct the foundation, slab on grade, and site concrete. As the subcontractor was pouring the slab on grade concrete, it was determined that there were deficiencies in the concrete. The prime contractor sent the subcontractor notice under the subcontract regarding the deficiencies and that the subcontractor needed to provide an action plan prior to future concrete placement. Although the subcontractor responded with a plan including when it was going to demolish the defective portion of the slab, it failed to live up to its own recovery schedule. Accordingly, the prime contractor terminated the subcontractor for default and incurred costs well in excess of the subcontractor’s original subcontract amount to complete the subcontractor’s scope of work. The subcontractor filed suit against the prime contractor and its Miller Act surety and the prime contractor counter-claimed against the subcontractor.

There were numerous interesting issues raised in this case. This article will only touch upon a couple of the legal issues. The first issue was whether the prime contractor properly terminated the subcontractor for default pursuant to the subcontract; if not, the termination should be deemed a termination for convenience. The Court found that the termination was procedurally proper, but declined to determine whether the termination was wrongful, perhaps because the Court determined that once the termination for default was properly implemented pursuant to the subcontract there was no reason to delve into any further analysis. In other words, once the prime contractor procedurally, properly terminated the subcontractor for default pursuant to the subcontract, it appeared irrelevant whether the cause forming the basis of the default was material. This implication is certainly beneficial for the prime contractor and it is uncertain why the Court did not entertain the argument as to whether the procedurally proper termination was wrongful. This determination would seem important because if the termination was wrongful, the terminating contractor would be responsible for its own cost overrun in addition to the costs incurred by the terminated subcontractor. Although, in this case, by the Court finding that the termination for default was procedurally proper, the Court seemed to recognize that there was cause supporting the implementation of the termination for default; otherwise, the termination for default would not have been procedurally proper.

The next issue discussed in this case pertained to recoverable delay-type damages under the Miller Act. The Court expressed:

A Miller Act plaintiff is entitled to recover under the bond the out-of-pocket labor and expenses attributable to delays.

***

[A] damage claim against a surety that does not flow directly and immediately from actual performance [of its agreement] is barred by the Miller Act….A subcontractor cannot recover on a Miller Act payment bond for the cost of labor and materials provided after the termination of work under a government construction project, and cannot recover profits on out-of-pocket expenditures attributable to delay.

Ragghianti Foundations, supra, at *18, 19 (internal quotations and citations omitted).

What does this mean? This means that a subcontractor is not entitled to recover against a Miller Act surety: (a) anticipated lost profits on work not performed, (b) delay-related costs that do not flow directly and immediately from actual performance under the subcontract, (c) profit on delay-related costs, and (d) costs incurred after the termination of the work. These are all categories of damages that are applicable to a terminated subcontractor that it will NOT be able to recover against a Miller Act surety. This is important because if a subcontractor is looking to capitalize on its damages for converting a termination for default into one of convenience, it may want to sue the terminating contractor so that it is not leaving any damages on the table by only suing the Miller Act surety.

NOT SO FAST DEVELOPER WITH YOUR CREATIVE EFFORT TO WIPE OUT THE CONTRACTOR’S (INFERIOR) LIEN!

Posted on September 21, 2014September 21, 2014 by Edward Garber

Two things are certain in construction: (1) developers will obtain construction loans to finance the construction of their project and (2) there will unfortunately be bad projects where the developer’s lender forecloses on the (first priority) mortgage given in connection with the construction loan. Not only is this bad for the developer, but it is bad for contractors because the lender will look to foreclose (and wipe out) all inferior liens, such as unpaid contractors and suppliers’ liens (which will be inferior to the lender’s mortgage).

The case of CDC Builders, Inc. v. Biltmore-Sevilla Debt Investors, LLC, 39 Fla. L. Weekly D1997a (Fla. 3d 2014) illustrates a bad project where a lender moved to foreclose on a construction loan. But, unlike a more traditional example of the construction lender foreclosing, this case involved a hyper-creative attempt by the developer to purchase its own construction loan and then foreclose on the corresponding mortgage for the sole purpose of intentionally wiping out its general contractor’s lien.

In this case, the developer hired the contractor to build luxury homes. The contractor completed the homes, but the developer failed to pay the contractor for the last eight homes. The contractor recorded construction liens to collateralize its nonpayment. The developer was unable to pay off its construction loan due to a lack of luxury home sales. To avoid the lender foreclosing, the developer negotiated loan extensions where the developer was required to pay money to reduce the lender’s exposure on the loan. However, the developer did not want its payments to reduce the principal of the loan. Why? Because the developer wanted to ensure there would be no equity in the real property to satisfy the contractor’s liens. So, the developer negotiated with its construction lender to treat any money it paid the lender for loan extensions as junior liens against the property. The developer then had another company created. This other developer-related company purchased the construction loans from the construction lender in exchange for loan assignments. (This was done so the other company maintained a first priority interest with the real property since it purchased the original construction loans.) Once this other developer-related company purchased the construction loans, it moved to foreclose on the loans. Why? Because, by doing so, the developer could wipe out the contractor’s liens as inferior liens on the real property. Very creative and it actually worked as the trial court entered a final summary judgment of foreclosure in favor of this developer-related company (meaning the contractor’s inferior liens would be valueless based on the equity in the real property).

The Third District Court of Appeal reversed the trial court’s foreclosure judgment (as there were questions of fact as to whether the developer-related company was actually created by the same investors that controlled the developer). The Third District, employing a policy of fairness, held that:

“The law does not permit a person to borrow money from a bank, give the bank a mortgage, incur additional liens and junior mortgages on the property, purchase the mortgage back from the bank, and then foreclose on the mortgage for the primary purpose of eliminating the additional liens and junior mortgages.

***

[I]nvestors cannot grant mortgages, contract for the improvement of the property mortgaged, and then use a network of companies to purchase and foreclose the mortgage for the primary purpose of extinguishing the construction liens that increased the value of the property. To hold otherwise would undermine the long-standing principle…persons cannot do indirectly what they are not permitted to do directly.”

CDC Builders, supra.

Stated differently, and less eloquently then the Third District, the law does not permit a developer to undertake creative avenues to purchase the very mortgage and loan it originally obtained to finance its construction for the sole purpose of cheating its contractor out of payment for improving the real property. To find otherwise would simply give the developer a windfall since it would not have to pay for construction improvements that it wanted and which improved the value of its property.

THE CLEVER ACCORD & SATISFACTION DEFENSE

Posted on August 31, 2014August 31, 2014 by Edward Garber

A dispute concerning amounts owed (whether owed from an owner to contractor, a contractor to subcontractor, a subcontractor to supplier, etc.) is routine on a construction project. Even in these disputes, the party responsible for owing money may recognize there is an undisputed amount actually owed to the other party, although not the amount the other party claims. While I am a believer in tendering undisputed funds, sometimes there are clever and strategic ways to tender that money.

For instance, the defense of accord and satisfaction is a defense that the party receiving the money deposited the money in full satisfaction of a disputed claim. The decision in St. Croix Lane Trust & M.L. Shapiro, Trustee, v. St. Croix at Pelican Marsh Condominium Association, 2014 WL 3882458 (2d DCA 2014), while not a construction dispute, illustrates strategy in tendering money in full satisfaction of a claim and then relying on the defense of accord and satisfaction. In this case, a condominium association foreclosed on a unit for unpaid assessments. The unit was sold at a foreclosure sale to a Trust for $100. The $100 was insufficient to pay the association the amount of its foreclosure judgment so the association sent a letter to the Trust advising that the Trust owed the association unpaid assessments that accrued on the unit prior to the foreclosure sale (in excess of $30,000). The Trust disputed the amount it owed and thought it owed $840. In this regard, the Trust sent a letter to the association (through counsel) stating, “[I]n a good faith effort to resolve this matter I have enclosed herewith a check in the amount of $840.00….Be advised and warned, this check is tendered in full and final satisfaction of all claims made against the Trust and the property….” Despite this letter accompanying the check, the association negotiated the check and then threatened to foreclose a lien it recorded against the Trust’s unit due to the dispute. The Trust filed a lawsuit seeking declaratory relief whether it owed the association any money. An argument it raised was accord and satisfaction since the association negotiated the $840 check clearly sent in full satisfaction of all claims.

On appeal, the Second District agreed with the Trust that accord and satisfaction applied to discharge the Trust of any more monies owed relating to the dispute. The Second District relied on Florida Statute s. 673.3111 that provides:

“(1) If a person against whom a claim is asserted proves that that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, that the amount of the claim was unliquidated or subject to a bona fide dispute, and that the claimant obtained payment of the instrument, the following subsections apply.

(2) Unless subsection (3) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.”

Furthermore, Florida case law defines an accord and satisfaction as follows:

“An accord and satisfaction results as a matter of law when the creditor accepts payment tendered on the expressed condition that its receipt is deemed to be a complete satisfaction of a disputed issue. This court has long held that cashing a check containing language that it is in full payment of the debtor’s obligations creates an accord and satisfaction with regard to the claim for which payment was tendered.”

United Auto Ins. Co. v. Palm Chiropractic Center, Inc., 51 So.3d 506, 509 (Fla. 4^th DCA 2010) (internal citation omitted)

If you are trying to devise clever strategy to set up an accord and satisfaction defense, you can send undisputed money with an accompanying letter clearly expressing that the money is in full and final satisfaction of the claim / dispute. Or, clearly delineate this point on the check. The recipient should not negotiate the check and should instead return it. If the money is truly undisputed, the paying party can always re-tender that money to take that undisputed amount off the table without conditioning it as a full settlement of the claim. But, if the check is negotiated, as it was in this case, the party has just set up an accord and satisfaction defense!