QUICK NOTE: A CONSTRUCTION LIEN IS NOT INTENDED TO LAST INDEFINITELY

A construction lien is not intended to last forever.  A construction lien must be recorded within one year from its recording date because a construction lien only lasts for one year by operation of law.   You will not be able to foreclose a construction lien after this one-year period expires.  This is why it is always good practice to calendar the expiration of this one-year period when a construction lien is recorded.   There is never a good reason to engage in a last minute scramble to file a foreclosure lawsuit on the expiration date (or shortly before).      While I always believe a lienor should work with counsel to record a construction lien, regardless, I would certainly recommend a lienor to work with counsel to ensure lien rights are properly perfected so that when it becomes necessary to foreclose the lien, the strategy is in place to file the foreclosure lawsuit.

 

Importantly, an owner can shorten the one-year period for a lienor to foreclose its construction lien by properly recording a Notice of Contest of Lien.  A Notice of Contest of Lien will shorten the period for a lienor to foreclose its construction lien to sixty days.   It is always beneficial to record the Notice of Contest of Lien sooner than later because it puts the onus on the lienor to either foreclose the construction lien or lose its lien and ability to foreclose its lien by operation of law.  That’s right – if the lienor does not foreclose its lien within the sixty-day window, it will have lost its lien rights.   There are times where an owner of real property records a Notice of Contest of Lien without the use of counsel.  I do not suggest this for a couple of reasons.  First, you want to ensure this is done right and, second, there may be other strategic decisions that may be better implemented based on the circumstances of the dispute.

 

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.

 

LUMP SUM SUBCONTRACT? PERHAPS NOT.

Lump sum subcontract?   Perhaps not due to a recent ruling where the trial court said No!” based on the language in the subcontract and contract documents generally incorporated into the subcontract.

 

This is a ruling on an interpretation of a subcontract and contract documents incorporated into the subcontract that I do not agree with and struggle to fully comprehend.  The issue was whether the subcontract amount was a lump sum or subject to an audit, adjustment, and definitization based on actual costs incurred.  Of course, the subcontractor (or any person in any business) is not just interested in recouping actual costs, but there needs to be a margin to cover profit and home office overhead that does not get factored into field general conditions.  

 

In United States v. Travelers Casualty and Surety Company, 2018 WL 6571234 (M.D.Fla. 2018), a prime contractor was hired to perform work on a federal project.  During the work, the Government issued the prime contractor a Modification that had a not-to-exceed value and required the prime contractor to track its costs for this Modification separate from other contract costs.  In other words, based on this Modification, the prime contractor was paid its costs up to a maximum amount and the prime contractor would separately cost-code and track the costs for this work differently than other work it was performing under the prime contract.   

 

The prime contractor hired a subcontractor to perform a scope of fireproofing work relative to the Modification.  The subcontract amount was $646,886 and the subcontractor claimed it was due and owing $376,609 upon completing the work and filed a lawsuit against the prime contractor’s Miller Act payment bond.  

 

The prime contractor argued that the subcontract amount was not lump sum and was subject to definitization, auditing, adjustment, and change, although it certainly is not uncommon by any means that a prime contractor working under a cost-plus scenario to enter lump sum subcontracts.   The subcontract contained the following language:

 

  • The Contractor agreed to pay the Subcontractor for the complete performance of the Subcontract the sum of $646,886, subject to additions and deductions for changes agreed upon in writing…and Contractor further agreed to make all partial and final payments in accordance with the terms and provisions of the Subcontract Documents.
  • The Subcontractor had to submit a complete and accurate schedule of various parts of the Subcontractor’s work aggregating the total sum of the Subcontract, itemized and detailed as required by the Contractor and supported by such evidence as to its correctness as the Contractor may direct.
  • Each partial payment and final payment would be subject to final audit and adjustment and Subcontractor agreed to reimburse the Contractor for overpayment.
  • The Contractor was entitled to make changes in the work that could cause an increase or decrease in the work.
  • The Contract Documents including certain Federal Acquisition Regulation (FAR) clauses were incorporated into the Subcontract.

 

The subcontractor argued that this was not a unit cost contract, but a lump sum contract, and it did not agree to any such changes (such as those that would have removed a scope of its work).  Thus, the subcontractor completed its work and should be entitled to the subcontract amount.

 

The trial court did not agree with the subcontractor: “The Court finds that the Subcontract contains unambiguous language which shows the Subcontract amount was subject to definitization, adjustment, and audit, rather than being a fixed-price amount.”  United States, supra, at *6. 

 

Huh!!??!!

 

The language in the subcontract was relatively standard subcontract language included in most subcontracts.   The changes clause is standard that allows the contractor to increase or decrease the work and the subcontractor is required to proceed with any changes.  The schedule of values language is standard, which is nothing more than an administrative vehicle for purposes of allocating payment based on percentages of work performed.   The overpayment clause is relatively standard.  As the subcontractor argued, the subcontract amount was not based on specific unit costs measured against a specific unit of measurement.  The subcontract did not unequivocally state that the subcontractor would be paid a cost of the work plus a specific markup for profit and overhead.   Nothing of the sort and nothing identifying what should be construed a permissible cost of work versus an impermissible cost of work so that the subcontractor could specifically track its costs of work.  There was nothing that identified the subcontract amount would be reconciled based on the subcontractor’s actual costs of the fireproofing work.  If it did, then the argument that it was not a lump sum amount makes sense.  But, what is there to audit?  The subcontractor’s actual costs should be less than the fixed amount in light of a profit and overhead margin.  The subcontract did not identify what this margin should even be.  If it were a unit cost contract, that margin would be built into the unit costs.  If it were a cost of the work subcontract, as mentioned, it would clearly specify what the agreed markup was and the permissible costs of work to be tracked.  Also, nothing in the subcontract mentioned the subcontractor would only be paid its time and materials based on a specific labor rate where the profit and overhead would be built into the labor rate.

 

As it pertains to the FAR clauses, the trial court held that, “Incorporation by general reference only incorporates the quality and manner of the subcontractor’s work from the prime contract, not the rights and remedies he may have against the prime contractor.”  United States, supra, at *8.   This makes sense and, for this reason, the trial court held that the general incorporation by reference language only incorporated the FAR clause or the Modification at-issue only if they refer to the quality and manner of the subcontractors’ work.  Based on this, the trial court explained that language in the Modification requiring the prime contractor to track its costs was incorporated  into the subcontract because it related to the manner in which the work was to be completed.  This does not make sense as the prime contractor is tracking the fireproofing costs by buying out that scope at a fixed amount.  

 

The trial court’s interpretation based on rather common and standard subcontract language could ultimately turn every fixed price subcontract that requires an audit as a requirement of the subcontractor to track actual costs without any true understanding as to how actual costs are determined, reconciled, or what the appropriate markup should even be.

 

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.

QUICK NOTE: NOT IN CONTRACT WITH THE OWNER? SERVE A NOTICE TO OWNER.

A subcontractor or supplier not in direct contract with an owner must serve a Notice to Owner within 45 days of initial furnishing to preserve construction lien rights.  Of course, the notice of commencement should be reviewed to determine whether the subcontractor or supplier has construction lien or payment bond rights so that it knows how to best proceed in the event of nonpayment.   Serving a Notice to Owner should be done as a matter of course — a standard business operation; no exceptions.  

 

However, if a supplier specially manufactures or fabricates material for purposes of a construction project, it must serve the Notice to Owner within 45 days from the actual start of fabrication, and not from when the materials are delivered to the site.  A reason for this is that a supplier of specially fabricated material can lien for the unpaid material even if the material is NOT incorporated into the construction project.  This is different than a supplier liening for other material which does require the material to be incorporated into the project.

 

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.

RELEASE LANGUAGE EXTENDED TO SUCCESSOR ENTITY BUT ONLY COVERED “KNOWN” CLAIMS

A recent case contains valuable analysis that has impact on whether a “successor” entity will be bound by a settlement agreement it was not a direct party to.  This case contains arguments for contractors that can be raised in a number of different contexts if it is sued by a successor or related entity.  

 

The same case discusses the difference between releasing a party for “known” claims without releasing the same party for “unknown” claims.  This is an important distinction because unknown claims refer to latent defects so a release that only releases a party for known claims is not releasing that party for latent defects.

 

 

In MBlock Investors, LLC v. Bovis Lend Lease, Inc., 44 Fla. L. Weekly D1432d (Fla. 3d DCA 2019), an owner hired a contractor to construct a project.  At completion, the owner transferred the project to an affiliated entity (collectively, the “Owner”).  The contractor sued the Owner for unpaid work, the Owner claimed construction defects with the work, and a settlement was entered into that released the contractor for KNOWN claims.  Thereafter, the Owner defaulted on the construction loan and agreed to convey the property through a deed in lieu of foreclosure to an entity created by the lender (the “Lender Entity”). 

 

The Lender Entity sued the contractor for construction defects – in negligence (negligent construction) and a violation of Florida’s building code.   The contractor argued that such claims should be barred by its settlement agreement with the Owner.  There were two driving issues:

 

First, did the settlement agreement with the Owner extend to the Lender Entity because the Lender Entity was a successor entity to the Owner?  

 

Second, even if the Lender Entity was a successor entity to the Owner, were the construction defects latent defects because the settlement agreement only provided a release of KNOWN (or patent) defects?

 

As to the first issue, the appellate court held that the Lender Entity was a successor entity to the Owner. 

 

[I]t is rather clear that [Lender Entity] is in fact, [Owner’s] ‘successor’ for purposes of the settlement agreement with [contractor] because [Lender Entity] took over the Property and all of [Owner’s] rights with regard to the Property.  Thus, [Lender Entity] clearly met the privity requirement for the application of res judicata in this case: it has a mutual or successive relationship to the same right that [Owner] had when it settled with [contractor]: a reduction in the amount owed to [contractor] for its services in exchange for releasing [contractor] from any claims of construction defects as provided for in the [settlement agreement].

 

As to the second issue, and really the driving issue whether or not the Lender Entity was a successor, was whether the release even protected the contractor from the types of construction defect claims sought.   This is a question of fact because the settlement agreement only included a release of “known” claims and did NOT release the contractor for “unknown” claims, i.e., latent defects.    Hence, the Lender Entity will establish such claims were unknown or could not reasonably have been discovered at the time of the settlement (a latent defect).  The contractor will try to argue otherwise creating an issue of fact as to whether the settlement agreement released the contractor for the construction defects the Lender Entity is asserting.

 

 

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.