THERE IS NO SYMPATHY IF YOU FAIL TO READ CLOSELY THE FINAL NEGOTIATED CONSTRUCTION CONTRACT

Posted on February 20, 2022February 20, 2022 by Edward Garber

When an opinion in a case starts with, “Unlike some motions, not even the most ingenious lawyers could make this one complicated,” you know you are in for an interesting read. This was how the opinion started in U.S. f/u/b/o Hambric Steel and Fabrication, Inc. v. Leebcor Services, LLC, 2022 WL 345636 (M.D. GA. 2022), which concerns a Miller Act payment bond dispute between a subcontractor and prime contractor on a federal construction project.

As demonstrated below, the moral of this case is in fact simple. Read what you sign BEFORE you sign! No ifs, ands, or buts. Failure to do so will garner very little sympathy.

This case dealt with a prime contractor arguing that the subcontractor pulled the wool over its eyes by surreptitiously altering the final negotiated redlined contract between the parties. In particular, the prime contractor claimed that the dispute resolution provision was supposed to include a Virginia venue provision. However, the subcontractor “fraudulently” changed this provision to make it a Georgia venue provision after the final contract had been agreed to during the negotiation. Yet, it is undisputed that the executed contract between the parties included a Georgia venue provision.

The Miller Act contains a statutory venue requirement; however, this requirement can be modified by a venue provision / forum selection clause in the subcontract. Here the prime contractor wanted venue to be in Virginia even though the executed subcontract contained a Georgia venue provision. The BIG problem for the prime contractor:

[The prime contractor] has not pointed to any evidence that it was prevented from reading the revisions to the contract draft related to the forum selection clause. Through the exercise of reasonable diligence, [the prime contractor] certainly could have discovered the change. It possessed the revised draft, had ample time to review it, and chose to sign it. While [the subcontractor] may have edited the forum selection clause in a manner different than other revisions made during the negotiation process, nothing prevented [the prime contractor] from reading the final revised draft in its entirety before signing it. Choosing not to do so for the sake of convenience does not excuse it from being bound by the contract that it signed. Moreover, [the subcontractor’s] failure to affirmatively and specifically highlight the changes for [the prime contractor] does not amount to fraud. The revision was clearly set out in the final draft document and could have been noticed through reasonable diligence. Signing a contract that is different than the one the party thought it had negotiated is not a sufficient basis, standing alone, to reform the fully executed written agreement.

Leebcor Services, supra, at *2

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.

VENUE FOR MILLER ACT PAYMENT BOND WHEN PROJECT IS OUTSIDE OF US

Posted on September 1, 2019September 1, 2019 by Edward Garber

The proper venue for a Miller Act payment bond claim is “in the United States District Court for any district in which the contract was to be performed and executed, regardless of the amount in controversy.” 40 U.S.C. s. 3133(b)(3)(B).

Well, there are a number of federal construction projects that take place outside of the United States. For these projects, where is the correct venue to sue a Miller Act payment bond if there is no US District Court where the project is located? A recent opinion out of the Southern District of Florida answers this question.

In U.S. ex. rel. Salt Energy, LLC v. Lexon Ins. Co., 2019 WL 3842290 (S.D.Fla. 2019), a prime contractor was hired by the government to design and construct a solar power system for the US Embassy’s parking garage in Burkina Faso. The prime contractor hired a subcontractor to perform a portion of its scope of work.

The subcontractor remained unpaid in excess of $500,000 and instituted a Miller Act payment bond claim against the payment bond surety in the Southern District of Florida, Miami division. The surety moved to transfer venue to the Eastern District of Virginia arguing that the Southern District of Florida was an improper venue. The court agreed and transferred venue. Why?

Initially, because the project is outside of the US, the subcontractor could NOT sue the surety where the project is located. Under the Miller Act, the venue provision was enacted for the benefit of the prime contractor and surety and, therefore, “the final site of the government project is dispositive of the [venue] matter.” US ex. rel. Salt Energy, LLC, 2019 WL at *4 (rejecting the subcontractor’s argument that venue for a Miller Act payment bond claim can be at a venue independent of jobsite activities.)

Therefore, to determine the appropriate venue provision (as the venue set forth under the Miller Act would be inapplicable to a project outside of the US), the Court had to look at general venue standards governing federal courts. The Court adopted the general venue provision in 28 U.S.C. s. 1391 finding that appropriate venue would be “wherever any defendant resides or wherever a substantial part of the events or omissions giving rise to the claim occurred.” U.S. ex. rel. Salt Energy, LLC, 2019 WL at *4.

The surety resided in Tennessee. However, the surety did not attempt to transfer the case to an applicable District Court in Tennessee, but instead, moved to transfer to the Eastern District of Virginia. The surety argued, and the Court agreed, that the Eastern District of Virginia is appropriate because this is where the government executed the prime contract, where the awarding agency is located, where invoices were sent, and where the prime contractor submitted deliverables. The subcontractor countered that a substantial portion of its work occurred in the Southern District of Florida where it is located, making the Southern District of Florida an appropriate venue. Unfortunately for the subcontractor, the Court was not buying this argument because the activities the subcontractor claimed it performed in the Southern District of Florida were in relation to its subcontract, not the prime contract, and were largely administrative or ministerial in nature – substantial performance did not occur in the Southern District of Florida.

The surety would have been able to transfer venue to the appropriate district court in Tennessee (where it resided) or Virginia (where a substantial part of the events giving rise to the claim at issue took place).

The subcontractor’s argument to keep venue in the Southern District of Florida was a worthy argument. However, the Court perceived many of the activities the subcontractor performed in the Southern District (coordinating, billing, phone calls, etc.) were not a substantial part of the events giving rise to the claim. The Court was more focused on activities in relation to the prime contract, and because the prime contract and awarding agency were in the Eastern District of Virginia, that was a more appropriate venue.

Venue is an important consideration in any dispute, including a Miller Act payment bond dispute when a foreign project is involved and the venue provision in the Miller Act does not apply.

A FORUM SELECTION PROVISION IN A SUBCONTRACT CAN BENEFIT A MILLER ACT PAYMENT BOND SURETY

Posted on October 10, 2015October 10, 2015 by Edward Garber

The recent opinion in U.S. ex rel. Galvin Bros., Inc. v. Fidelity and Deposit Co. of Maryland, 2015 WL 5793346 (E.D.N.Y. 2015) illustrates when a forum selection provision in a subcontract can benefit a Miller Act payment bond surety.

The subcontract in this case contained the following forum selection provision:

6.4 Notwithstanding the foregoing, and in consideration of $100 paid to the Subcontractor, the receipt whereof is acknowledged as part of the Subcontract Sum, at the sole option of the Contractor, any controversy, dispute or claim between the Contractor and the Subcontractor related in any way to this Agreement or the Project may be determined by a separate action in court or by a separate arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then pertaining, whichever the Contractor may elect in its sole discretion. The parties expressly agree that the venue of any such court action or arbitration shall be Boston, Massachusetts. Any award rendered by the arbitrator or arbitrators shall be final and judgment may be entered upon it in accordance with the applicable law in any court having jurisdiction.

6.8 The Subcontractor, on behalf of itself and its assignees, sureties and agents, if any, agrees that the dispute resolution procedure in this Article shall inure to the benefit of, and be enforceable by, the Contractor and its sureties or assignees, and that such terms shall be deemed incorporated into any payment, labor and material or other similar bond issued by or for the Subcontractor regarding the Project.

Galvin Bros., supra, at *1.

The bolded language is key as this language is designed to allow the Miller Act payment bond surety to reap the benefit of the forum selection provision in the subcontract. This makes sense since the prime contractor routinely defends and indemnifies its surety.

The subcontractor in this case sued the prime contractor’s Miller Act payment bond surety where the project was located. The Miller Act requires a claimant to sue the surety in the federal district court where the contract is performed. Notwithstanding, the surety moved to dismiss the action or transfer venue to Boston, Massachusetts in accordance with the forum selection provision in the subcontract.

The federal district court dismissed the lawsuit for numerous reasons.

First, the court held that even though the Miller Act requires the lawsuit to be brought in the federal district court where the contract was to be performed, such “venue” can be modified by contract and, particularly, by a forum selection provision.

Second, the language bolded above in the forum selection provision allows the surety to enforce the forum selection provision in the subcontract.

Third, although all witnesses are located outside of Boston and are instead located where the project is located (and it would be more expensive to litigate in Boston), this alone is not enough to render meaningless a forum selection provision in a negotiated subcontract. In other words, the subcontractor cannot demonstrate that it would be deprived of a fair opportunity to litigate its Miller Act payment bond claim in Boston.

And, fourth, because the forum selection provision allows the parties to arbitrate at the sole option of the contractor, transferring venue would not be appropriate since the contractor / surety may elect to arbitrate this dispute. For this reason, the court dismissed the lawsuit. (To me, dismissing this action makes no sense other than to potentially create a statute of limitations argument when the subcontractor elects to re-file the lawsuit in a federal district court in Boston. And, to the extent the surety or prime contractor want to compel arbitration, they can certainly file a motion to compel arbitration pursuant to the forum selection provision once the action is transferred.)

If you are a prime contractor, the bolded language is language that you may consider incorporating into your subcontracts so that your surety can enforce a forum selection provision in the subcontract. And, if you are a subcontractor, be mindful of such a provision when electing where to file a lawsuit such as a Miller Act payment bond lawsuit.