TRANSFERRING A LIEN TO A LIEN TRANSFER BOND DURING A LIEN FORECLOSURE LAWSUIT

Posted on May 18, 2012 by David Adelstein, Esq.

 

When a construction lien is recorded, the lien can be transferred to a lien transfer bond (thereby removing the encumbrance or cloud on the property caused by the lien).   The procedure to transfer a lien to a lien transfer bond is statutory in nature and governed under Florida Statute §713.24.

 
A lien does not necessarily have to be transferred to a bond immediately after the lien is recorded. Rather, an owner (or other person with interest in the property) can transfer the lien to a bond after the entity or person that recorded the lien (referred to as the “lienor”) files a lien foreclosure lawsuit. In this circumstance, it is important for the lienor to know that they must amend their lien foreclosure action to assert a claim against the lien transfer bond; otherwise, the lienor will essentially lose its lien rights. The lienor will not be able to foreclose the lien as to the property (because it was transferred to a bond) and the lienor will not be able to pursue its claim against the lien transfer bond.

 
This is exactly what happened in The Cool Guys, LLC d/b/a Paragon Indoor Air Quality v. Jomar Properties, LLC, 2012 WL 716084 (Fla. 4th DCA 2012). In this case, the lienor recorded a construction lien and filed a lien foreclosure lawsuit. While the lawsuit was pending, the owner transferred the lien to a lien transfer bond. Under Florida Statute §713.24, if a lien is transferred to a bond during the pendency of a lien foreclosure lawsuit, the lienor must commence an action against the lien transfer bond within 1 year after the transfer. The lienor in this case, however, did not amend its lawsuit to assert a claim against the lien transfer bond until two years after it was transferred. The owner moved for summary judgment arguing that the lienor could no longer assert a claim against the bond because it waited more than one year after the lien was transferred to the bond to assert its claim on the bond. The trial court agreed which was affirmed by Florida’s Fourth District Court of Appeal. Thus, the lienor was neither able to foreclose its lien on the property or the bond.

 
Therefore, as an owner, it is important to know that a construction lien recorded on your property can be transferred to a lien transfer bond immediately or during the course of a lien foreclosure lawsuit. As the lienor moving to forclose the lien, it is important to know that when a lien is transferred to a lien transfer bond, the recourse is against the bond and not the real property.

INDEMNITY AGREEMENTS BETWEEN A SURETY AND ITS BOND PRINCIPAL

Posted on May 15, 2012 by David Adelstein, Esq.

Sureties that issue contractors payment and/or performance bonds obtain indemnity agreements with the contractor, or bond principal, prior to issuing such bonds. These indemnity agreements, besides requiring the bond-principal contractor to indemnify, defend, and hold harmless the surety in the event a claim is submitted on the bonds, are designed to fully protect the surety in the event the contractor fails to do so.

 

There are situations where a surety needs to protect its own interests and comply with the terms of the bond and pay a claim on a performance or payment bond (such as if the contractor gets into financial trouble, walks off a project, is not paying subcontractors, etc.). If the surety pays a claim, they typically assert a claim against the bond-principal contractor for breach of the indemnity agreement along with any person that personally guaranteed the agreement (which is often the case). The indemnity agreement will include a provision that provides that the bond-principal assigns certain collateral to the surety in the event the principal is in default of the agreement. Among those rights that are collaterally assigned to the surety would be all of the principal’s contract rights and causes of action for accounts receivable.

 

The case of Guarantee Co. of North America v. Mercon Construction Co., 2012 WL 1232104 (M.D.Fla 2012), exemplifies a surety’s rights under the indemnity agreement. This case involved a situation where a surety paid a performance bond claim on behalf of its principal contractor and sued the contractor, as well as others, under the indemnity agreement. The surety also exercised its right under the indemnity agreement and settled a claim the contractor had against another payment bond (issued by a different surety). In other words, the surety’s position was that the claim for an account receivable under the other payment bond was collaterally assigned to the surety due to the contractor’s default. The contractor asserted a counterclaim arguing, among other things, that the surety did not have the authority to settle its account receivable payment bond claim. The Middle District disagreed and dismissed the contractor’s counterclaim with prejudice!

 

If a bonded contractor is involved in a situation where its surety either paid a claim or will pay a claim, it is important for the contractor to consult an attorney to understand the surety’s rights under the indemnity agreement. Again, surety’s oftentimes have the indemnity agreement personally guaranteed so that the obligations under the agreement could not only impact the bond-principal contractor but also the guarantors to the agreement.

THE CARDINAL CHANGE DOCTRINE

Posted on May 15, 2012 by David Adelstein, Esq.

The cardinal change doctrine is a doctrine that originated from government contract work in the United States Court of Federal Claims and, until recently, was not really discussed or applied in a Florida case. This changed when the Southern District of Florida in Hartford Casualty Insurance Co. v. City of Marathon, 825 F.Supp.2d 1276 (S.D. Fla. 2011), applying Florida law, discussed the cardinal change doctrine and used it to relieve a performance bond surety of obligations under a performance bond. While the specific facts of this case will not be discussed in detail, the Court’s discussion of the cardinal change doctrine will be because it is a doctrine that contractors on very difficult projects (i.e., completed project is substantially different than original plans, there were never-ending or wholesale, material changes, and the completed project cost substantially more than original contract amount) may want to argue under.

 

In this case, the Court held: “To determine whether a change order is outside the general scope of the underlying construction contract so as to qualify as a cardinal change, courts look to the following factors:

 

(i) whether there is a significant change in the magnitude of work to be performed; (ii) whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract; and (iii) whether the cost of the work ordered greatly exceeds the original contract cost.”

 

City of Marathon, 825 F.Supp.2d at 1286 citing Becho, Inc. v. United States, 47 Fed.Cl. 595, 601 (Fed.Cl.2000). The Court expressed that these factors are all fact-intensive analyzed on a case-by-case basis and the party utilizing this doctrine must prove the factors with particularity. Id. citing PCL Const. Serv., Inc. v. United States, 47 Fed.Cl. 745, 804 (Fed.Cl. 2000).

 

Regarding the first factor—whether there is a significant change in the magnitude of work to be performed—the Court will look to see whether the completed project is substantially different than the project called for in the original plans and specifications. Id. citing Wunderlich Contracting Co. v. United States, 173 Ct.Cl. 180 (1965). For instance, in City of Marathon, the Court found this factor applied because the government gave the contractor a change order that added a new water treatment plant to the contract that was to be built on a separate location with different plans and specifications. Additionally, the cost of the new water treatment plant was more than 100% of the contract amount.

 

Regarding the second factor—whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract—the Court will look to see whether the change is contemplated by the contract. City of Marathon, supra, citing Becho, 47, Fed.Cl. at 601. In City of Marathon, the Court found that while the contract contemplated changes (as most construction contracts do), the magnitude of the change from both a scope and cost standpoint was not contemplated.

 

And, regarding the third and last factor—whether the cost of the work ordered greatly exceeds the original contract cost—the Court will look to see the total increase of the original contract amount due to the change or changes. In this regard, the Court noted that increases of the original contract amount of 100% or more tend to suggest a cardinal change whereas increases less than this percentage tend not to. In City of Marathon, as previously stated, the change increased the original contact amount by more than 100%, thus satisfying this factor.

 

Although the application of this doctrine carries a heavy burden, there are certain projects where it may apply. Contractors that end up constructing a project substantially different then the plans and specifications their contract is based on which results in extensive change orders / wholesale, material changes and massive cost increases may, depending on the circumstance, want to argue under this doctrine in order to circumvent harsh contractual provisions to recoup their costs, etc. for performing additional work.

BUTTONING-UP CONTRACTUAL INDEMNIFICATION LANGUAGE

Posted on May 15, 2012 by David Adelstein, Esq.

A contractual indemnification provision is one of the most important provisions in construction contracts.   Owners want to be indemnified from the general contractor to the extent a person or entity performing a scope of the general contractor’s work asserts a claim against the owner or a person is injured on the owner’s property.   Likewise, general contractors want their subcontractors to indemnify them to the extent the owner asserts a claim against them arising out of the general contractor’s work or a person or entity performing a scope of the subcontractor’s work asserts a claim against the general contractor.

 

Indemnification (hold harmless) provisions need to be carefully drafted because Florida Statute §725.06 includes a limitation on indemnification for construction contracts.   In short, this statute provides in material part that if a contract requires an indemnitor (such as a subcontractor required to indemnify a general contractor) to indemnify and hold harmless the indemnitee (such as the general contractor receiving the indemnification) “for liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee…[the indemnification provision] shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.”   Stated simply, if the indemnification provision does not comply with Florida law, it may be unenforceable – a very bad thing for a party expecting to be indemnified!

 

Recently, the First District Court of Appeal in Griswold Ready Mix Concrete, Inc. v. Reddick, 2012 WL 1216268 (Fla. 1st DCA 2012), dealt with the enforceability of an indemnification provision.   In this case, a concrete supplier leased a pump truck (to facilitate pouring concrete). The lease agreement provided that the concrete supplier was to:

 

“(g) To assume all risks and liabilities for and to indemnify Lessor [of the pump truck]…and Lessor’s agents against all claims, actions, suits, penalties, expenses and liabilities, including attorneys fees, whether or not covered by insurance, for (i) loss or damage to the Equipment; (ii) injuries or deaths of any persons; and (ii)[sic] damage to any property, howsoever arising or incurred from or incident to the use, operation or possession of the Equipment, unless such claims, actions, suits, penalties, expenses or liabilities are caused solely by the intentional conduct of the Lessor or its agents.”

 

When concrete was being poured, a construction worker was injured and asserted a claim against the concrete supplier and the lessor of the pump truck. The lessor settled the claim and asserted a claim for contractual indemnification against the concrete supplier based on the contractual language above. Among other arguments, the concrete supplier argued that the indemnification provision was unenforceable under Florida Statute §725.06 because it contained no monetary limitation.

 

Although the trial court found the indemnification provision to be enforceable, the First District disagreed, maintaining, “The indemnity provision at issue in this case does not contain a dollar limit to Griswold’s [concrete supplier] potential liability. For that reason, it is void and unenforceable as provided in section 725.06, and the trial court erred in ruling otherwise.”

 

While this case does not contain a lengthy discussion with respect to the language of the indemnification provision between the concrete supplier and the lessor of the pump truck, it appears clear that the provision required the concrete supplier to indemnify the lessor for the lessor’s potential negligence (i.e., damage or injury caused in whole or in part by any act, omission, or default of the lessor). For this reason, the indemnification provision needed to include a monetary limitation and should have under the law also expressed that it was part of the bid documents or project specifications.

 

This case illustrates the importance of making sure an indemnification provision is properly worded and drafted in accordance with Florida law, especially if you are a contractor or an owner where the indemnification provision is a material portion of the contract. As you can see, not doing so can have the harsh effect of having the indemnification provision declared unenforceable.

STATUTORY IMPLIED WARRANTIES FOR CONDOMINIUM ASSOCIATIONS

Posted on March 4, 2012 by David Adelstein, Esq.

Statutory implied warranties are a valuable tool for condominium associations (as well as purchasers of units) of newly formed condominiums.  The warranties provide the association with direct claims to assert against the developer, the general contractor, subcontractors, and even suppliers, if there is defect with the condominium.  The specifics of the implied warranties, and the timing as to when these statutory warranty claims must be brought, can be found in Florida’s Condominium Act, specifically Fla. Stat. s. 718.203.

 

Recently, in Harbor Landing Condominium Owners Association, Inc. v. Harbor Landing, L.L.C., 2012 WL 254971 (Fla. 1st DCA 2012), a condominium association initiated a lawsuit that included a breach of the statutory implied warranty claims provided for in Fla. Stat. s. 718.203.  The association sued, amongst other entities, the manufacturers of coating that was applied on the exterior railings.  The association argued that the statutory implied warranties extended to the manufacturer because the manufacturer was a supplier (and a statutory implied warranty claim extended to suppliers).  While there are certainly situations whereby a manufacturer could also be a supplier, in this case, the manufacturer of the coating did not supply the exterior railings.  Rather, a separate entity supplied the railings.  For this reason, the court said that the statutory implied warranties could not extend to the manufacturer of the coating applied to the railings (since a different entity supplied the railings). This ruling simply means that the association could bring the statutory warranty claim against the supplier of the railings, just not the manufacturer of the coating.

 

The relevance of this case is that if there are defects with a condominium, particularly a recently built condominium, it is important for the association (or unit owner) to seek legal counsel to best preserve rights in seeking recourse based on the defects.  This includes the appropriate entities to sue as well as the arguments / claims to include against the entities based on the asserted defects.

 

A CONTRACTOR’S RIGHT TO SET-OFF AMOUNTS FROM A SUBCONTRACTOR

Posted on February 18, 2012 by David Adelstein, Esq.

Oftentimes, subcontractors perform trade work for the same contractor on multiple projects.  Because of this, it is practical for contractors to include in the subcontract a provision that authorizes them to set-off the subcontract amount due to any defects, breaches, etc. by the subcontractor that occur on another project.  On the other hand, subcontractors that understand the ramifications of this provision, want to delete this provision from any subcontract in order to keep their receivables from one project completely separate from another project.

 

In Carolina Consulting Corp. d/b/a Barrier Wall of South Florida v. Ajax Paving Industries, Inc. of Florida, 2012 WL 163927 (2nd DCA 2012), a roadway contractor subcontracted the paving work on two separate projects (in two different counties).

 

After the subcontractor completed its work for the first project (“Project One”), a payment dispute arose whereby the subcontractor asserted it was owed more money than it was paid.  At this time, the second project (“Project Two”) had not begun and was severely delayed.

 

When Project Two was ready to commence, the paving subcontractor advised the contractor that it would not perform until it was paid in full for Project One and was issued a change order for the increase in material price due to the severe delay to the start date.  The subcontractor later stated that it would not perform until it received adequate assurances from the contractor of the contractor’s ability and willingness to pay for Project Two.  The contractor then terminated the subcontractor and hired another subcontractor to perform the paving work for Project Two at an increased rate and lawsuits between the contractor and paving subcontractor were initiated.

 

The trial court held the subcontractor was entitled to suspend its performance on Project Two until it received adequate assurance that it would be paid for the work.  The trial court further found that the subcontractor should be awarded approximately $119,000 for unpaid work for Project One and approximately $105,000 for the contractor wrongfully terminating the subcontractor on Project Two.

 

The contractor appealed to the Second District Court of Appeal maintaining that the subcontractor breached the subcontract for Project Two when it decided to condition its performance on the receipt of adequate assurances of the contractor’s ability to pay.  The Second District agreed and reversed the trial court.

 

In examining this issue, the Second District looked at Florida’s Uniform Commercial Code, particularly Florida Statute s. 672.609(1), dealing with the sale of goods.  This statute, in short, provides that “a merchant has the right to demand adequate assurance of performance ‘[w]hen reasonable grounds for insecurity arise with respect to the performance of’ the other party.”  Carolina Consulting, 2012 WL at *2.

 

The Second District, however, noted that it previously declined to address whether this right under the Uniform Commercial Code applies in the context of construction contracts. The Court further declined to address this issue in this case.  Rather, it stated that under the facts of the case, the subcontractor did NOT have a reasonable basis to demand adequate assurances from the contractor because the contractor had a payment bond (which is designed to guarantee payment to subcontractors and suppliers, etc.).  For this reason, the Court maintained that the subcontractor breached the subcontract for Project Two and the contractor had the right to set-off amounts for the breach for Project Two for any amounts the contractor may have owed the subcontractor for Project One.

 

On this point, the Second District stated:

 

“Under the terms of both subcontracts, upon Ajax’s [subcontractor] breach of subcontract, the contractor had the right to hire another subcontractor to perform the work and then deduct the cost from any amount owed to Ajax in connection with the Pasco County subcontract [Project One].”

 

This bolded language seems to suggest that the contractor’s subcontract included a provision that allowed it to deduct or set-off amounts owed on one project due to defects or breaches on another project.  However, even without this contractual language, it would seem that any amounts owed to the subcontractor for Project One would be offset by any amounts owed to the contractor for Project Two (due to the subcontractor’s breach of that subcontract).  In this scenario, the outcome could be the same irrespective of the contractual language.  Although, without the contractual set-off language, and assuming the contracts permitted prevailing party attorneys’ fees, it would seem that the subcontractor would be entitled to its fees for the contractor’s breach of the subcontract for Project One and the contractor would likewise be entitled to its fees for the subcontractor breaching the subcontract for Project Two.  With the contractual set-off language, it is highly possible that the subcontractor would not be entitled to recover its fees for the contractor’s breach of the subcontract for Project One because the contractor had the contractual right to set-off such amounts due to any breaches associated with Project Two.  This is a confusing but important distinction.

 

As it relates to the subcontractor demanding adequate assurances, this case is important because it illustrates that if the contractor has a payment bond, it will be very difficult for a subcontractor to ever condition its performance on demanding adequate assurance of the contractor’s ability to pay (i.e., its creditworthiness).  While, irrespective of the payment bond, such an argument seems extremely challenging if made under the Uniform Commercial Code, many times contracts (particularly prime contracts) will include language that allows a contractor to demand adequate assurance of the paying party’s creditworthiness.  Even with this contractual language, it will still be a difficult argument to make if there is a payment bond in place.  Also, expanding this rationale, because of lien rights, a court may find that because a contractor/subcontractor has the right to lien the project (a subcontractor can lien the project if there is not a payment bond), it is really never in the situation to reasonably condition its performance on adequate assurances because it could preserve or try to collateralize its payment claim by recording a lien on real property as well as pursue a breach of contract claim against the nonpaying party.

 

A CONSULTING ENGINEER / ARCHITECT’S PROTECTION FROM A NEGLIGENCE CLAIM BY A CONTRACTOR

Posted on November 27, 2011 by David Adelstein, Esq.

The case of Recreational Design & Construction, Inc. v. Wiss, Janney Elstner & Associates, Inc., 2011 WL 5117163 (S.D.Fla. 2011), is a recent case discussing whether an independent engineering firm hired as a consultant by an owner can be liable to the general contractor for professional negligence under Florida law.  In this case, the City of North Miami Beach (“City”) hired a contractor to perform all design and construction services for a water slide project (“Contractor”).  The City also hired a separate engineering firm to evaluate and perform inspections of the contractor’s work (“Engineer”).  The engineering firm hired another engineering firm as a subconsultant to perform the engineering inspections (“Subconsultant”).

 

 

The Subconsultant issued a report to the Engineer that was provided to the City explaining that the water slide the Contractor designed and started to construct was structurally unsafe.  The report recommended repairs to be implemented on the slide.  The City rejected the Contractor’s work based on the Subconsultant’s recommendation and required the Contractor to implement the repairs before completing the work.

 

 

The Contractor, instead of suing the City, sued the Engineer and Subconsultant for professional negligence (also known as professional malpractice) to recover its costs in reconstructing the slide and implementing the repairs recommended to the City.  Both the Engineer and Subconsultant moved to dismiss the Contractor’s complaint arguing that they did not owe a duty of care to the Contractor; therefore, they could not be liable in negligence to the Contractor under the law.  The Southern District of Florida agreed with the Engineer and Subconsultant and dismissed the Contractor’s complaint with prejudice.

 

 

In order to be liable for professional negligence, a plaintiff must prove the following elements against the defendant-professional: 1) the defendant owed a duty of care to the plaintiff; 2) the defendant breached its duty of care; and 3) the breach of the duty of care proximately caused damages to the plaintiff.  See Recreational Design & Construction, 2011 WL at *2 citing Moransis v. Heathman, 744 So.2d 973, 975 n.3 (Fla. 1999).   The element of duty, however, is a question of law in Florida and must be determined by the court before a negligence case proceeds to the jury or trier of fact.  See Wallace v. Dean, 3 So.3d 1035, 1046 (Fla. 2009).

 

The Contractor relied on the Florida Supreme Court’s ruling in A.R. Moyer, Inc. v. Graham, 285 So.2d 397 (Fla. 1973), in arguing that the Engineer and Subconsultant owed the Contractor a duty to perform its work and issue recommendations to the City with reasonable care and due diligence.  In A.R. Moyer, the Florida Supreme Court held that a general contractor can maintain a cause of action against a supervising architect for the architect’s negligent performance of a contractual duty (even though the contractor has no contractual privity with the architect).  Particularly, the Florida Supreme Court found that the following circumstances would present a professional negligence cause of action by the contractor against a supervising architect or engineer:

 

“(a) supervising architect or engineer is negligent in preparation of plans and specifications; (b) the supervising architect or engineer negligently causes delays in preparation of corrected plans and specifications; (c) the supervising architect or engineer negligently prepared and negligently supervised corrected plans and specifications; (d) the supervising architect or engineer negligently failed to award an architect’s certificate upon completion of the project; (e) the architect or engineer was negligent in exercise of supervision and control of contractor.”  A.R. Moyer, 285 So.2d at 402.

 

 

Of importance, the “professional defendant [in A.R. Moyer] was an architect whose responsibilities on the relevant project were to prepare the designs and plans for the project, approve the overall structural components or framework for the project, and supervise the general contractor’s execution of those plans, including having the authority to halt the contractor’s work.”   Recreational Design & Construction, 2011 WL at *4.   In other words, A.R. Moyer dealt with more of a traditional architect or engineer that, among other things, served as the architect / engineer-of-record for the project and had detailed contract administration services that enabled them to make decisions that could effect the contractor, which is why the Court described the professional as a supervisory architect or engineer.

 

 

But, in Recreational Design & Construction, the Engineer and Subconsultant, were really nothing more than a consultant providing expert-related services issuing recommendations, advice, or suggestions to the City in which the City could accept or reject.  The Engineer and Subconsultant did not serve as the engineer-of-record.  They did not design the plans for the City’s project. They did not issue specifications for the project.  They were not performing supervision to ensure that the Contractor’s construction complied with their design (since they were not the designer).  And, they did not have authority to halt the construction of the project or issue corrective details directly to the Contractor.  Instead, as previously mentioned, their services were truly within the realm of consulting services in which it was up to the City to determine how it wanted to utilize any suggestions, advice, or recommendations.   For these reasons, and because the role of the Engineer and Subconsultant in this case was substantially different than the role of the architect in A.R. Moyer, the Southern District held they did not owe a duty of care to the Contractor.  See also McElvy, Jennewein, Stefany, Howard, Inc. v. Arlington, Elec., Inc., 582 So.2d 47 (Fla. 2d DCA 1991) (finding that architect did not owe duty to subcontractor because architect was required to issue advice to owner regarding interpretation of architect’s design, but it was the owner responsible for making the ultimate decision based on the advice of the architect).

 

 

An architect or engineer that is serving as the architect / engineer-of-record for a construction project may want to implement certain language in their contract with the owner that while it will render certain advise, recommendations, or suggestions to the owner regarding its design and specifications and interpretations thereof, it is the owner that is required to render the ultimate decision regarding the advice, suggestions, and recommendations.  This way, if the contractor does pursue a professional negligence claim against them, they can argue they were not a supervisory architect or engineer and should not be deemed to owe a duty to the contractor because it was the owner that made the ultimate decision that affected the contractor.

 

 

Also, owners on construction projects sometimes hire other consultants or experts to assist in the construction of their project.  For instance, sometimes owners hire a building envelope consultant or a glazing consultant, etc.  These consultants sometimes worry about the contractor asserting a negligence claim against them based on their advice, suggestions, and recommendations made to the owner.  These consultants, however, should be able to rely on the arguments in Recreational Design & Construction to support they do not owe a duty to the contractor.  These consultants can also employ the same contractual language suggestions above so that their contract specifically expresses that it is the owner that is required to act on the advice, suggestions, and recommendations of the consultant so that it remains understood that the owner, and not the consultant, has ultimate control over the contractor’s work.

 

CAREFUL DRAFTING OF ARBITRATION PROVISIONS TO ENSURE THE STATUTE OF LIMITATIONS APPLIES TO CLAIMS RESOLVED THROUGH ARBITRATION

Posted on November 27, 2011 by David Adelstein, Esq.

Many construction contracts include arbitration provisions as the means to resolve a dispute instead of resorting to litigation.  Certain owners prefer to resolve their disputes with contractors through arbitration and certain contractors, likewise, prefer to resolve their disputes with subcontractors through arbitration.

 

Recently, the case of Raymond James Financial Services, Inc. v. Phillips, 36 Fla. L. Weekly D2479a (2d DCA 2011), certified the following question to the Florida Supreme Court:

 

“Does Section 95.011, Florida Statutes, apply to arbitration when the parties have not expressly included a provision in their arbitration agreement stating that it is applicable.”

 

While this case is not a construction case, the question certified to the Florida Supreme Court is a fundamental issue that applies to ALL arbitration provisions.  Section 95.011 is included in Florida Statutes Chapter 95 (“Chapter 95″) dealing with the statute of limitations for actions.  The statute of limitations requires lawsuits to be brought within the specified timeframe set forth in Chapter 95 or else the action is time-barred, meaning it cannot properly be asserted under the law.  In this case, however, the Second District found that there was nothing in the arbitration provision at-issue that required actions to be brought within the limitations periods set forth in Chapter 95 and, along these lines, nothing in Chapter 95 clarified that the statutes of limitations for actions was intended to apply to disputes resolved through arbitration.

 

This is crucial because if the statute of limitations is not intended to apply to disputes resolved through arbitration, and nothing in the arbitration provision clarifies that the statute of limitations periods set forth in Chapter 95 are intended to apply, then there is technically NO time period for when a dispute needs to be initiated because they could never be time-barred under the law.  The corollary of this is that it could open arbitration floodgates because parties that thought they could no longer bring an arbitration claim under the law could now assert an argument that their claim was never time-barred under the law.

 

With respect to construction contractors, parties that utilize the AIA Agreements (promulgated by the American Institute of Architects) that select arbitration as the dispute resolution procedure should ensure the agreement contains a provision to the effect:

 

“In no effect shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim would be barred under the applicable statute of limitations.”

 

The AIA standard form agreements usually include this provision almost verbatim.  This provision should not be deleted.  When drafting or negotiating an AIA agreement that includes an arbitration provision, a party should ensure that language to the effect is included in the agreement and not deleted or substantially manipulated so as to render it ambiguous.  Also, parties that do not use an AIA agreement and prefer arbitration need to draft such a provision or mimic one after the provision used in the standard form AIA agreements to ensure the statute of limitations applies to claims / disputes resolved through arbitration.  Not having this provision could potentially have a detrimental effect many years later if arbitration is initiated and the claimant argues that the statute of limitations does not time-bar any claims under the contract.

 

CAREFUL DRAFTING OF PAY-WHEN-PAID PROVISIONS

Posted on November 27, 2011 by David Adelstein, Esq.

The pay-when-paid provision is an important aspect of a contractor’s subcontract.  Under this provision, the risk of an owner’s nonpayment to a contractor for a subcontractor’s scope of work is shifted to the subcontractor.  In other words, a contractor is not responsible for paying the subcontractor unless the contractor was specifically paid by the owner for the subcontractor’s work–the owner’s payment to the contractor serves as an express condition precedent to the contractor’s payment to a subcontractor.  However, for pay-when-paid provisions to be enforceable, they need to be clearly drafted so that it is unequivocal that the owner’s payment to the contractor for a subcontractor’s work serves as the express condition precedent to the contractor’s payment to the subcontractor.

 

Subcontractors oftentimes look for arguments to circumvent the pay-when-provision.  If the contractor has a payment bond, then the subcontractor does not need to look to the contractor for payment, even if the owner has not paid the contractor for the subcontractor’s work.  When there is a payment bond, the subcontractor can sue the bond and the surety that issued the bond cannot raise the pay-when-paid provision as a defense.        See OBS Co. v. Pace Construction Corp., 558 So.2d 404 (Fla. 1990).

 

However, if there is no payment bond, or the subcontractor, for whatever reason, did not properly preserve its rights to pursue a payment bond claim, the recent case of International Engineering Services, Inc. v. Scherer Construction & Engineering of Central Florida, LLC, 2011 WL 5109306 (5th DCA 2011), provides another argument that a subcontractor can raise in an effort to escape the harsh effect of a pay-when-paid provision.  In this case, the subcontract incorporated by reference the contractor’s prime contract with the owner.  The prime contract provided:

 

“Neither final payment nor any remaining retained percentage shall become due until the Contractor submits to the Architect (1) an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owner’s property might be responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied.”

 

The subcontractor successfully argued that this provision in the prime contract, which was incorporated into its subcontract, created an ambiguity with the pay-when-paid provision.  The reason being is that this provision maintained that the owner was not responsible for paying the contractor until the contractor paid its subcontractors.  Well, this conflicts with a pay-when-paid provision which says a contractor is not responsible for paying a subcontractor until an owner has paid the contractor.  By the subcontractor arguing that this provision in the prime contract conflicts and creates an ambiguity with the pay-when-paid provision, the Fifth District held that the pay-when-paid provision was unenforceable because it was ambiguous.  Thus, the contractor was responsible for paying the subcontractor!

 

The outcome of this case is important for both contractors and subcontractors.  For contractors, it is important to ensure that language in the prime contract does not conflict with language in the subcontract, particularly the pay-when-paid provision.  Typically, all subcontracts incorporate by reference the prime contract.  One thing a contractor can do is to include a provision in the subcontract that says something to the effect: “If anything in the subcontract conflicts or creates an ambiguity with anything in the prime contract, the terms of the subcontract shall govern.  This includes anything that conflicts with the pay-when-paid provision included in this subcontract and subcontractor therefore understands that owner’s payment to contractor for subcontractor’s scope of work is an express condition precedent to contractor’s payment to subcontractor.”

 

For subcontractors, it is important to request a copy of the owner’s prime contract with the contractor since it is incorporated into the subcontract.  By looking for a provision in the prime contract that may conflict with the pay-when-paid provision in the subcontract–a provision similar to the one referenced above that requires the contractor to pay its subcontractors before the owner is obligated to pay the contractor final payment–can allow the subcontractor to argue that the pay-when-paid provision should be deemed unenforceable thereby making the contractor liable to the subcontractor for payment even if the contractor was not paid by the owner.

 

CONTRACTORS AND SUPPLIERS-DO NOT NEGLECT THE NOTICE REQUIREMENTS IN FLORIDA’S LIEN LAW

Posted on October 9, 2011 by David Adelstein, Esq.

Oftentimes, subcontractors, suppliers, and sub-subcontractors rely on companies to serve the statutory notices that are prerequisites to preserving a lien or bond claim under Florida’s Lien Law in the event of nonpayment.  However, if these notices are not served in accordance with Florida’s Lien Law, the outcome could be injurious to the subcontractor, supplier, or sub-subcontractor.  Stated differently, the outcome could mean a loss of lien or bond rights which may be the only true leverage the party has to secure payment.

 

The case of Stock Building Supply, Inc. v. Soares Da Costa Construction Services, LLC, 36 Fla. L. Weekly D2200a (Fla. 3d DCA 2011), illustrates the absolute importance of complying with the notice requirements in Florida’s Lien Law.

 

 

In this case, an owner hired a contractor to build a condominium.  The contractor subcontracted with a structural shell subcontractor which, interestingly, held a 40% ownership interest in the contractor.   The subcontractor engaged a supplier to provide rebar to the project.  The contractor also engaged the same supplier to provide certain materials to the project.  To graphically illustrate:

 

 

Contractor –> Shell Subcontractor –> Supplier

and

Contractor –> Supplier

 

 

Originally, there was not payment bond on the project.  Therefore, once the supplier was engaged to provide materials, it served a statutory notice to owner on the contractor and the owner stating that it was supplying materials under an order given by the subcontractor.  It served a second notice to owner on the contractor and owner stating it was supplying materials under an order given by contractor. (Notably, Florida Statute §713.06 requires lienors not in privity of contract with the owner to serve a notice to owner on the owner no later than 45 days after commencing services.  The notice should also be served on anyone up the chain to the owner the lienor is not in privity of contract with, i.e., the sub-subcontractor or supplier to the subcontractor should serve the notice on the contractor too.  This is a mandatory statutory notice if there is not a payment bond in place.)

 

 

Shortly after construction commenced, there was a funding problem that led to a halt in construction.  The supplier recorded 2 claims of lien for nonpayment: one for nonpayment by the subcontractor and the other for nonpayment by the contractor.

 

 

The owner then paid the supplier and had the liens satisfied and recorded a notice of termination of the initial notice of commencement which is a procedure under Florida’s Lien Law that allows an owner to terminate a notice of commencement that accurately states that all lienors were paid in full.  After the notice of commencement was terminated by law, the owner recorded a new notice of commencement that attached a payment bond, meaning the owner’s property was now exempt from all liens except that of the general contractor it hired.  (One of the main reasons an owner would terminate a notice of commencement and record a new notice of commencement is so a construction lender financing construction can record a mortgage and maintain a first priority encumbrance on the property in the event the owner did not repay the loan.)

 

 

Once construction restarted, the supplier continued supplying rebar to the structural shell subcontractor.  The supplier also continued to supply building materials to the contractor.  However, for whatever reason, the company the supplier hired to serve the statutory notices served only one statutory notice to contractor stating that the supplier was supplying building materials under an order given by the contractor.   Unlike the notice to owner mentioned above, when there is a payment bond in place, lienors not in privity of contract with the contractor must serve a notice on the contractor stating that they intend to look to the contractor’s payment bond for payment.  In other words, the supplier was required to serve a notice on the contractor that it was supplying materials under an order given by the subcontractor, but it really wasn’t required to serve the same notice for the supplies it was providing under an order given by the contractor.

 

 

The point or objective of the notices is so the owner, in a situation without a payment bond, and a contractor, in a situation with a payment bond, know specifically who is performing work on the project to ensure these entities get paid.  The reason why a contractor doesn’t need to serve a notice to owner (when there is no bond) or a subcontractor doesn’t need to serve a notice on the contractor (when there is a payment bond) is because the owner or contractor in these situations know the entities it hired to ensure these entities get paid.

 

 

Although the contractor paid the structural shell subcontractor for the rebar, the subcontractor did not pay the supplier.  The supplier then served a notice of nonpayment on the payment bond surety (another prerequisite to suing on a general contractor’s payment bond) and filed suit.

 

 

The main issue in this case was whether the supplier had properly preserved a payment bond claim for the rebar it supplied to the subcontractor that it was not paid for by virtue of its neglect in serving the proper notice on the contractor that it was supplying rebar under an order given by the subcontractor.  The trial court concluded that the supplier could NOT pursue a payment bond claim because it failed to serve this notice.  The Third District affirmed the trial court on this issue essentially holding that because lien and bond claims are creatures of statute, the supplier’s failure to comply with the lien law by serving this initial notice was fatal to its bond claim for rebar materials it supplied to subcontractor.

 

 

Unfortunately for the supplier, this is a hypertechnical argument that killed its claim against the payment bond for materials it supplied under the order given by the structural shell subcontractor. This ruling, however, does not seem to make sense in light of the specific facts of the case.  Again, the whole point of the notice is so the contractor in this situation knows that the supplier is supplying rebar to the subcontractor and that it will look to the payment bond if it is not paid so that the contractor can affirmatively ensure the supplier gets paid.  First, the contractor knew the supplier was supplying rebar because before the owner terminated the notice of commencement, the supplier was supplying the same rebar and the contractor was made aware of same. Second, after the owner recorded a new notice of commencement with a payment bond, the supplier served a notice on the contractor (although it was not legally required to do so) that it was serving materials to the contractor per an order given by the contractor.  Well, at this point in time, the contractor had continued knowledge the supplier was still involved in the project and still supplying materials, even though there may have been oversight in that another notice was not also provided by supplier for the materials it was providing under an order given by the subcontractor.  And, last, the subcontractor owned 40% of the contractor, thus, how could contractor not know that its minority owner was still utilizing and ordering rebar?  The Third District did not get into this, but I believe this fact is important because it would seem to impute some knowledge on the contractor under this fact pattern  that the subcontractor was still utilizing the supplier, which just so happened to an identical supplier that contractor was utilizing and ordering materials from.  Thus, where was the prejudice to the contractor??

 

 

Regardless of the equities of the Third District’s decision, the morale remains that it is absolutely critical to comply with Florida’s Lien Law, as in many circumstances, oversight or neglect will not be tolerated!!  Do not let this happen to you!

 

In this case, the supplier used an outside company to serve the required statutory notices and it was uncertain why the outside company did not serve the required notice on the contractor that supplier would look to the bond for protection if it was not paid for materials supplied to the subcontractor, especially when it served the unnecessary notice for materials being supplied directly to contractor.  The supplier or outside company’s oversight, whatever the case may be, resulted in a loss of its payment bond claim.

 

 

To prevent this from happening, it is always a good idea to utilize an attorney on the front end to ensure the proper notices are being served.  An attorney understanding construction will ask: 1) is it a private project or publicly funded project; 2) do you have a copy of the notice of commencement (to see whether there is or is not a payment bond in place); 3) who hired you; and 4) when did you first start commencing services.  In the event of nonpayment, the attorney will ask the follow-up questions: 5) when was your last day on the job and 6) how much are you owed and how did you arrive at this specific amount (e.g., retainage owed, contractual work owed, change order work owed, does this include delay-related damages or lost profit, etc.) in order to ensure the lien or payment bond claim comports with Florida’s Lien Law.