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.

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.

REQUESTS FOR EQUITABLE ADJUSTMENT AND CONSTRUCTIVE CHANGES IN FEDERAL CONSTRUCTION PROJECTS

Posted on October 29, 2014October 29, 2014 by Edward Garber

Federal government construction contracts contain a changes clause. The changes clause in fixed-price federal construction contracts is contained in F.A.R. 52.243-4 (set forth at the bottom of this posting). This changes clause allows the government, through the contracting officer, to direct changes to the construction contract. It also allows the prime contractor to request an equitable adjustment to its contract price associated with either a directed / formal change or a constructive change.

Formal / directed changes issued to the prime contractor by the government are easy to comprehend. These typically are less likely to lead to a dispute because the government acknowledges increased costs are owed to the prime contractor through its issuance of a formal change order / directive.

A constructive change, on the other hand, oftentimes is what leads to a dispute if the government does not agree that it caused the contractor to incur increased costs to perform the contract. The United States Court of Federal Claims in CEMS, Inc. v. U.S., 59 Fed.Cl. 168 (Fed.Cl. 2003) contains a good discussion as to what constitutes a constructive change:

“A constructive change generally arises where the Government, without more, expressly or impliedly orders the contractor to perform work that is not specified in the contract documents. The constructive change doctrine provides recovery for contractors as the rationale for constructive changes involves the objective of persuading a contractor to continue to work pending resolution of any dispute involving the work at issue.

***

There are two basic components to the constructive change doctrine-the change component and the order/fault component. The change component describes work outside of the scope of the contract, while the order/fault component describes the reason that the contractor performed the work.

***

A constructive change issue arises for work if the Government either expressly or impliedly ordered the work outside the scope of the contract, or if the Government otherwise caused the contractor to incur additional work….In any event, the Government must have directed the contractor to perform the additional work. The work must not have been volunteered.”

CEMS, supra, at 203 (internal quotations and citations omitted).

It is the constructive change that typically leads to what is referred to as a request for equitable adjustment or REA. An equitable adjustment compensates a prime contractor for the increased costs it incurs in performing the contract, whether due to additional work or delays caused by the government. Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221, 1243-44 (10^th Cir. 1999). “Some equitable adjustments are for work added by formal change orders….Other equitable adjustments result from ‘constructive changes,’ which occur when the government does something to increase the contractor’s costs without issuing a formal change order.” Id at 1244.

For a prime contractor to receive an equitable adjustment under the changes clause, it bears the burden of proving liability, causation, and injury. P.R. Burke Corp. v. U.S., 58 Fed.Cl. 549, 556 (Fed.Cl. 2003). The prime contractor must “prove that the government somehow delayed, accelerated, augmented, or complicated the work, and thereby caused the contractor to incur specific additional costs.” Morrison Knudsen Corp., 175 F.3d at 1244. Stated differently, “[b]efore an equitable adjustment will be granted, plaintiffs [prime contractor] are required to demonstrate that: (1) increased costs arose from conditions materially different from what the contract documents indicated and that such conditions were reasonably unforeseeable based on all information available to the contractor; and (2) the changes in the requirements caused the increased costs.” Sipco Services & Marine, Inc. v. U.S., 41 Fed.Cl. 196, 224 (Fed.Cl. 1998).

As a prime contractor, if you experience a constructive change (increased costs to perform your work), notify the government and request an equitable adjustment to the contract. If you volunteer to do additional work than you may be impacting your ability to request an equitable adjustment for a constructive change. It is all about knowing and understanding your rights under the contract so that, among other things, you can preserve your right to seek additional compensation / an equitable adjustment to your contract price.

52.243-4 Changes (JUN 2007)

(a) The Contracting Officer may, at any time, without notice to the sureties, if any, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes-

(1) In the specifications (including drawings and designs);

(2) In the method or manner of performance of the work;

(3) In the Government-furnished property or services; or

(4) Directing acceleration in the performance of the work.

(b) Any other written or oral order (which, as used in this paragraph (b), includes direction, instruction, interpretation, or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; provided, that the Contractor gives the Contracting Officer written notice stating (1) the date, circumstances, and source of the order and (2) that the Contractor regards the order as a change order.

(c) Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.

(d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.

(e) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph (b) above.

(f) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.

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.

DELAY, DELAY AND MORE DELAY! EXCUSABLE OR NON-EXCUSABLE?

Posted on October 19, 2014October 19, 2014 by Edward Garber

The word “delay” is an all too familiar word utilized during construction because it is not remotely uncommon for a construction project to experience delays. While contractors never want a delay to actually happen because time is money, delays unfortunately do happen as construction schedules are not written in stone.

There are two types of delay: (1) non-excusable delay (or inexcusable delay) and (2) excusable delay.

Non-excusable delay is the type of delay that contractors never want to hear. This is the delay solely caused by them and may trigger the owner’s assessment of liquidated damages. Not only this, but this type of delay will not entitle the contractor to additional time or compensation. Why? Because again, the delay was caused by the contractor, hence the reason why it is the type of delay a contractor never wants to hear!

Excusable delay is not the fault of the contractor and is the type delay that will entitle the contractor to additional time, additional compensation, or both. Excusable delay is further broken down into (a) compensable, excusable delay (entitling the contractor to additional compensation and time) and (b) non-compensable, excusable delay (entitling the contractor to additional time, but not additional compensation).

Excusable, compensable delay is a delay solely caused by the owner or its consultants and is not caused by the contractor. This is the good type of delay in the sense that it should entitle the contractor to additional time to substantially complete the project and, based upon the contract, additional compensation in the form of extended general conditions. This type of delay could be the result of owner-directed changes, differing site conditions, design revisions, suspension of performance, i.e., actions that are outside of the contractor’s control but within the owner and its agents’ control.

Excusable, non-compensable delay, on the other hand, is typically your force majeure delay including unusually severe weather conditions, fire, or labor strikes—these are the types of delay that are beyond any parties’ control in the construction process, which is why the contractor would be entitled to additional time, but not additional money.

The contractor claiming excusable delay has the burden of proving the delay. See R.P. Wallace, Inc. v. U.S., 63 Fed.Cl. 402, 409 (Fed.Cir. 2004) (“The contractor must prove that the excusable event proximately caused a delay to the overall completion of the contract, i.e., that the delay affected activities on the critical path.”). For this reason, it is important that the contractor well-document the cause of the delay including how the delay impacted its critical path, and provide timely notice under the contract regarding the event causing the delay.

Now, construction contracts contain may contain a “no damage for delay” clause that is designed to prevent the contractor from being entitled to extended general conditions for excusable, compensable delay. Basically, if there is an excusable delay, the contractor’s sole and exclusive remedy is an extension of time and not extended general conditions. The “no damage for delay” provision is enforceable in many jurisdictions. While there are certain recognized exceptions to the application of an enforceable “no damage for delay” provision (e.g., fraud, active interference), a contractor agreeing to such a provision certainly cannot operate on the premise that it will argue around it in the event of an excusable, compensable delay. Rather, the contractor needs to operate on the premise that it is assuming a certain risk that a delay could be caused by the owner or the owner’s agents and the contractor’s sole remedy for the delay is more time to substantially complete the project.

The objective for any contractor is to understand what the legal implications and consequences are for delays on a construction project, whether an excusable delay or non-excusable delay. Some tidbits for contractors to absolutely consider on the front-end and prior to the execution of the contract include:

Does the contract define excusable delay that would entitle the contractor to additional time and/or money? For instance, in government contracting, the prime contract may incorporate Federal Acquisition Regulation 52.249.10 and 52.249.14 regarding excusable delay, as set forth below.
Is there a “no-damage-for-delay” provision in the contract?
What are the notice provisions to ensure the contractor is timely providing notice for the cause of the delaying event? Notice should always be given even if the full impact of the delay is unknown. Many contracts contain onerous language that if notice is not given with “x” number of days after the delaying event, the contractor waives any and all claims for delay. Watch out for this!
Does the contractor have appropriate language in its subcontracts that will enable it to flow-down damages associated with non-excusable delay (the owner’s assessment of liquidated damages and the contractor’s own extended general conditions)?
Does the contractor have an experienced scheduling consultant or scheduler that can capture the delaying event to show the event impacted the critical path?

52.249-10 Default (Fixed–Price Construction) (APR 1984)

(a) If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed. In this event, the Government may take over the work and complete it by contract or otherwise, and may take possession of and use any materials, appliances, and plant on the work site necessary for completing the work. The Contractor and its sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated. This liability includes any increased costs incurred by the Government in completing the work.

(b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if–

(1) The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers; and

(2) The Contractor, within 10 days from the beginning of any delay (unless extended by the Contracting Officer), notifies the Contracting Officer in writing of the causes of delay. The Contracting Officer shall ascertain the facts and the extent of delay. If, in the judgment of the Contracting Officer, the findings of fact warrant such action, the time for completing the work shall be extended. The findings of the Contracting Officer shall be final and conclusive on the parties, but subject to appeal under the Disputes clause.

(c) If, after termination of the Contractor’s right to proceed, it is determined that the Contractor was not in default, or that the delay was excusable, the rights and obligations of the parties will be the same as if the termination had been issued for the convenience of the Government.

(d) The rights and remedies of the Government in this clause are in addition to any other rights and remedies provided by law or under this contract.

See also F.A.R. 52.249-14 (regarding bolded language).

UNPAID TENANT IMPROVEMENTS AND LIEN RIGHTS

Posted on October 15, 2014October 15, 2014 by Edward Garber

Contractors that perform tenant improvements / build-outs should know what their lien rights are when hired by the tenant (also referred to as the lessee). This is because a contractor hired by the tenant may think their lien rights extend to the real property owned by the landlord when in reality they do not.

Under Florida’s Lien Law, a landlord can take precautions to prevent their real property from being subject to liens by virtue of a tenant improvement. Many landlords take these precautions. If these precautions are taken, a contractor’s lien against the landlord’s real property for unpaid tenant improvements will fail and potentially expose the contractor to liability in the form of reimbursing the landlord for its attorney’s fees. Ultimately, if a landlord takes such precautions, the unpaid contractor can lien the tenant’s LEASEHOLD INTEREST, which is much different than the landlord’s interest. When the contractor moves to foreclose the lien, it is foreclosing on the leasehold interest and not the landlord’s real property. In other words, the foreclosure would result in the assumption of the lease (versus assuming title to the real property) and oftentimes is not an attractive option. Think about it. Which is better: assuming the leasehold interest of a new lease (where you will still be responsible for making the lease payments) or assuming title to the real property? Naturally, it is assuming the title that provides the value in a lien action.

Florida Statute s. 713.10 sets forth the precautions a landlord can take to prevent their property from being subject to liens for tenant improvements as follows:

(2)(a) When the lease [between the landlord and tenant] expressly provides that the interest of the lessor shall not be subject to liens for improvements made by the lessee, the lessee shall notify the contractor making any such improvements of such provision or provisions in the lease, and the knowing or willful failure of the lessee to provide such notice to the contractor shall render the contract between the lessee and the contractor voidable at the option of the contractor.

(b) The interest of the lessor is not subject to liens for improvements made by the lessee when:

1. The lease, or a short form or a memorandum of the lease that contains the specific language in the lease prohibiting such liability, is recorded in the official records of the county where the premises are located before the recording of a notice of commencement for improvements to the premises and the terms of the lease expressly prohibit such liability; or

2. The terms of the lease expressly prohibit such liability, and a notice advising that leases for the rental of premises on a parcel of land prohibit such liability has been recorded in the official records of the county in which the parcel of land is located before the recording of a notice of commencement for improvements to the premises, and the notice includes the following:

a. The name of the lessor.

b. The legal description of the parcel of land to which the notice applies.

c. The specific language contained in the various leases prohibiting such liability.

d. A statement that all or a majority of the leases entered into for premises on the parcel of land expressly prohibit such liability.

Contractors looking in the public records will many times find a short form lease or notice that prohibits the landlord’s property from being subject to liens for tenant improvements.

By way of example, in MHB Const. Services, L.L.C. v. RM-NA HB Waterway Shoppes, L.L.C., 74 So.3d 587 (Fla. 4^th DCA 2011), the landlord of a shopping center entered into a lease with a tenant. A notice of lien prohibition was recorded in the public records long before the lease was ever executed. The tenant hired a contractor to make tenant improvements and the landlord signed and recorded the required notice of commencement before construction began. The contractor recorded a construction lien against the landlord’s interest in the real property and foreclosed on the lien. The landlord relied on the notice of lien prohibition that was recorded in the public records. The contractor countered that by the landlord signing and recording the notice of commencement, the landlord cannot rely on the notice of lien prohibition. The contractor further argued that the landlord required or was responsible for construction because it gave its tenant a reimbursement towards construction improvements (very common). The appellate court disagreed with the contractor based in large part because the landlord complied with s. 713.10 to protect its property from liens.

As a contractor performing tenant improvements, you should know your rights in advance in order to understand what your lien rights are in the event of non-payment. One option contained in s. 713.10 that Florida’s Lien Law provides that is unfortunately not often utilized is:

(3) Any contractor or lienor under contract to furnish labor, services, or materials for improvements being made by a lessee may serve written demand on the lessor [landlord] for a copy of the provision in the lease prohibiting liability for improvements made by the lessee, which copy shall be verified….The demand must identify the lessee and the premises being improved and must be in a document that is separate from the notice to the owner….The interest of any lessor who does not serve a verified copy of the lease provision within 30 days after demand, or who serves a false or fraudulent copy, is subject to a lien under this part by the contractor or lienor who made the demand if the contractor or lienor has otherwise complied with this part and did not have actual notice that the interest of the lessor was not subject to a lien for improvements made by the lessee. The written demand must include a warning in conspicuous type in substantially the following form:

WARNING

YOUR FAILURE TO SERVE THE REQUESTED VERIFIED COPY WITHIN 30 DAYS OR THE SERVICE OF A FALSE COPY MAY RESULT IN YOUR PROPERTY BEING SUBJECT TO THE CLAIM OF LIEN OF THE PERSON REQUESTING THE VERIFIED COPY.

The bottom line is to KNOW your rights. If you specialize in tenant improvements or perform tenant improvements, know your rights under Florida’s Lien Law so that you know what your options are in the event of non-payment. This extends to any subcontractor that is performing work associated with tenant improvements. Since non-payment may only be collateralized by the leasehold interest, a contractor or subcontractor may want to take this into consideration when negotiating their contract. For instance, a contractor may want to ensure it has broad termination rights or suspension rights in the event of non-payment within “x” number of days. A subcontractor may not want a pay-if-paid provision so that it has better recourse against the contractor that hired it. Alternatively, parties may account for this risk by including a better mark-up. Again, knowing your rights on the front-end will allow you to best assess the potential risk of non-payment.

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.

KNOW YOUR BID PROTEST RIGHTS

Posted on October 7, 2014October 7, 2014 by Edward Garber

If you are a contractor that works on Florida public construction projects, then you understand that public projects are competitively solicited through a procurement method such as an invitation to bid, a request for proposals, or invitation to negotiate. Irrespective of the procurement method, a disappointed bidder (a bidder that was not awarded the contract for the project) may look to protest the award of the contract. Typically, the disappointed bidder is the second lowest bidder or a bidder that was deemed non-responsive or non-responsible by the public agency. The argument is that (a) but for the award of the contract to the awardee (which the public agency should have deemed a non-responsive or non-responsible bidder), the contract would be awarded to the disappointed bidder or (b) but for the disappointed bidder being deemed improperly non-responsive or non-responsible, the contract would be awarded to it. Regardless of the argument, the disappointed bidder must be responsive to the solicitation and be in a position to actually be awarded the contract; otherwise, its protest will be for naught as it will not have standing to bring the protest in that it will not be deemed adversely affected by the agency’s decision.

Bid protests for Florida state agencies are governed under the Administrative Procedures Act: Florida Statute s. 120.57(3). This statutory section should be set forth in the solicitation and the public agency’s notice of intent to award the contract. (Local public agencies may have their own bid protest procedures in their local codes or ordinances that describe the procedure to protest the award of a solicitation. The code or ordinance section governing the bid protest procedure will be in the solicitation and/or the notice of intent to award the contract for the project.)

Regarding bid protests governed under Florida Statute s. 120.57(3) for construction projects solicited by Florida state agencies, here are bullet points to remember:

The agency will post its notice of intended decision concerning the solicitation- this will usually be the notice that the agency is awarding the contract to a particular bidder.

A contractor adversely affected by the agency’s decision (i.e., the disappointed bidder) must file a notice of protest within 72 hours after the agency posts its notice of intended decision (exclusive of Saturdays, Sundays, and state holidays). Failure to timely file this notice of protest will constitute a waiver of the disappointed bidder’s right to protest.

The disappointed bidder must then file its formal bid protest petition within 10 days after its notice of protest is filed. This formal petition states the disappointed bidder’s factual and legal basis supporting its protest. Failure to timely file this formal petition will constitute a waiver of the disappointed bidder’s right to protest.

When the agency timely receives both the notice of protest and formal protest petition, it must stop the contract award process (meaning it cannot execute any contract) until the protest gets resolved (absent circumstances to avoid immediate and serious danger to the public).

Within 7 days of the timely petition to protest (exclusive of Saturdays, Sundays, and state holidays), the agency shall provide an opportunity to resolve the protest by mutual agreement. If the protest does not get resolved, the agency needs to determine whether there are disputed issues of material fact.

If there is NO disputed issue of material fact, an informal proceeding shall occur within the agency where the agency will enter a decision regarding the bid protest.

If there is a disputed issue of material fact, the agency must refer the protest to Florida’s Division of Administrative Hearings (referred to as DOAH) for a formal proceeding; a bid protest hearing will then be conducted in front of an administrative law judge. The administrative law judge will enter a recommended order regarding the bid protest that the parties will be able to take written exceptions to. The agency will then enter a final order regarding the protest (which oftentimes is aligned with the administrative law judge’s recommended order).

There are numerous nuances regarding bid protests inclusive of arguments forming the basis of the protest so it is important to know your rights, whether submitting a bid on a Florida state public project or a local government public project. Once bid opening occurs or there is an indication as to who the public agency will award the contract to, the disappointed bidder should serve a public records request (ideally, in person or by e-mail) to get an immediate copy of the anticipated contract awardee’s bid / proposal and, if applicable, any committee notes surrounding the award. This way the disappointed bidder can see whether there is any legitimate protest basis.

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.

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[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.